Note: This post was originally published in November 2013; however, the below still has relevant principles.
Please read the updated version here.
Estates of decedents who die after December 31, 2010 may elect to transfer any unused exclusion to the surviving spouse. The amount received by the surviving spouse is called the deceased spousal unused exclusion (DSUE) amount. Making this election can have a profound effect on the taxation of the estate of the surviving spouse.
Example: Bob and Jane are married and Bob passes away in 2012. Bob’s estate is valued at $3,700,000. Since Bob’s estate plan passed his entire estate to his wife Jane, the Federal estate tax would be zero due to the unlimited marital deduction afforded under the Internal Revenue Code. Since Bob’s estate did not utilize any of his federal estate tax exemption ($5,120,000 for individuals who died in 2012), the exemption is “wasted.” However, under the portability provisions of the federal estate tax, Bob’s estate can elect to pass that unused exemption to Jane by filing a Federal Form 706 and making the “Portability Election” on Bob’s estate tax return. If this “Portability Election” is made on Bob’s estate tax return, Bob’s unused estate tax exemption of $5,120,000 is transferred to Jane and increases her future estate tax exemption by this unused amount.
The highest marginal estate tax rate is currently 40%; therefore, the unused exemption passed from a decedent to his or her spouse via the “Portability Election” amount can result in significant estate tax savings.
Example: Suppose Jane in our prior example passes away in 2013. Assuming that Jane’s estate is valued at $6,000,000, if the “Portability Election” had not been made on Bob’s estate tax return, Jane’s taxable estate would be $750,000 ($6,000,000 less the $5,250,000 exemption for someone who dies in 2013). However, if the election had been made on Bob’s return, Jane’s taxable estate would be zero, as her total exclusion would be $10,370,000 (her $5,250,000 plus the portability from Bob’s estate of $5,120,000). Making this election would thus result in a sizable reduction in estate taxes.
A surviving spouse can apply the unused exclusion amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death.
Making the Election
To make the portability election, an estate tax return must be filed on time, even if the estate would not otherwise be required to file an estate tax return. Failure to file the estate tax return will result in the loss of the portability of the spouse’s unused exclusion amount. A timely filed return is one that is filed on or before the due date of the return, including extensions.
When a surviving spouse’s estate is expected to be valued at less than the estate tax exclusion amount when he or she passes, it may seem to be a waste of time and money to file a 706 Estate Tax Return for the pre-deceased spouse. However, in making that decision, one should consider the possibilities of the surviving spouse receiving inheritances or winning the lottery, or of Congress reducing the estate tax exemption at some time in the future. Any of these potential events could result in substantial estate tax considering the current tax rate on taxable estates is 40%.
If you believe that the election to transfer any unused exclusion to a surviving spouse applies to you, family members, or friends and would like additional information, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
