You can’t take it with you, but it’s getting easier to leave it to your heirs. The IRS recently released final rules detailing a generous estate-and gift-tax break for married couples who don’t set up expensive trusts before death. The break, known as “portability,”allows spouses to pass nearly $11million of assets to heirs free of estate tax. Without it, many couples would quality only for one estate-tax exemption instead of two.
This exemption, which is indexed for inflation, is $5.43million per individual in 2015. This year, only a tiny fraction of estates are expected to owe taxes.
But the new rules come with crucial caveats. “Individuals and advisers need to be aware that they must act quickly after the first spouse dies,” says Laura, an estate-tax lawyer at MW.
That’s because estate-tax returns must be filed with inie months of the death to take advantage of portability.
Many experts worry that executors will overlook this deadline, especiallly if an extate is smaller than the exemption and there is no other reason to file a return.
“this is a very real problem,”says Don. Not opting for portability can “shortchange the survivor and can put the executor at risk of being sued,” he adds.
Congress first created portability in 2010 and made it permanent in 2013 to address a long-standing issues.
Since 1981, the law has allowed spoused to leave assets to each other free of estate tax. But in such cases, the assets are sheltered by the marital benefit-and the couple in effect forfeits one of their two estate-tax exemptions. At the second death, only one exemption is left. Planners devised trusts to deal with this issue, but they can be costly and clumsy- and people have to be willing and able to plan ahead.
Portability allows the surviving spouse to pick up the unused portion of the partner’s gift and estate-tax exemption if the executor makes an election on Form 706, the estate-tax return.
Here’s how it could work: Say a couple has a total of $8million in assets, with $7million in a business and other assets owned by the husband, and $1million owned by the wife. If the wife died this year and left everything to her husband, he could have an extate of $8 million, $2.57 million above the current exemption. The federal tax due would be about $1 million.
If the executor files a return after the wife dies and elects portability, however, then the wife’s unused $5.43 million exemption carries over to the husband. That gives him a total of $10.86 million to shelter gifts made during his lifetime or assets left in his estate-so there is a good chance no dederal tzx would be ude.
In addition, portability does not prevent the survivor’s estate from getting a step up benefit at death, shich can cancel or reduce future capital gains taxes on assets.
What if a couple’s combined assets are far less than in this example-say well below $5M? Experts still recommend taking advantage of portability because assets can grow, especially if the second death could be decadfes away.
Who really knows what their estate’s going to be down the road?Besides assets growth, the survivor could get a windfall from elsewhere, such as an inheritance, or perhaps remarry someone with substantial assets.
