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Should you file a federal estate tax return for your spouse’s estate even though the value of his or her assets is less than the estate tax exemption? For answers, we asked Bruce Bell, an attorney at the Chicago office of Schoenberg Finkel Beederman Bell Glazer.
Larry Light: This is a heartbreaking time. But how do you handle this pressing tax question?
Bruce Bell: A federal estate tax return need not be filed for a decedent’s estate if the sum of the decedent’s lifetime and post-mortem transfers is less than the estate tax exemption, currently $12,060,000. Although not required, filing an estate tax return permits any unused portion of a deceased spouse’s estate tax exemption to be used by the surviving spouse for lifetime and post-mortem transfers.
Depending upon the size of the surviving spouse’s estate, this portability rule may be an effective means of avoiding estate taxes and maximizing the amount of assets which can pass to the next generation tax free.
Light: How do you figure out the unused portion?
Bell: The amount of a decedent’s unused estate tax exemption is the excess of the decedent’s estate tax exemption over the sum of the value of the decedent’s assets and gifts made during the decedent’s lifetime. Only if the aggregate amount of these transfers exceeds the exemption—that is, the $12 million-plus I just mentioned—will an estate tax filing be required, regardless of whether a tax is payable.
The overwhelming majority of taxpayers’ estates will not surpass this threshold and, as a result, many surviving spouses simply ignore the portability option. But ignoring portability may be a missed opportunity for taxpayers.
Light: What are the filing procedures?
Bell: Clearly, if a couple’s joint estate exceeds the federal estate tax exemption, a federal estate tax return should be filed for the estate of the first spouse to die. A potential decrease in the estate tax exemption is another scenario where an estate tax return is a worthwhile endeavor. Under current law, the federal estate tax exemption is scheduled to decrease in 2026 and ensuing years. Therefore, the unused estate tax exemption of the decedent may be needed to avoid estate taxes on the surviving spouse’s death.
Light: Could you give an example?
Bell: Assume Steve dies in 2022 owning $7,000,000 of assets, having made no taxable gifts during his lifetime. Also assume Steve’s assets all pass to his surviving spouse, Jill, and no estate tax filing is made on Steve’s death. Because the value of Steve’s estate is worth less than the current estate tax exemption of $12,060,000, no estate tax filing is necessary.
Suppose, however, after Steve’s death, the estate tax exemption is reduced to $6,000,000 after which Jill dies with $8,000,000 of assets of her own which includes the $7,000,000 of assets she received from Steve upon his death. In this case, an estate tax would be imposed at Jill’s death based on the difference between the size of her estate, $8,000,000, and her estate tax exemption of $6,000,000.
If instead, an estate tax return had been filed on Steve’s death, his unused exemption of $5,060,000 ($12,060,000 of exemption less the $7,000,000 value of Steve’s assets) will be available for use by Jill, during her lifetime or upon her death. By filing an estate tax return for Steve’s estate, no estate tax will be due on Jill’s subsequent death as her $8,000,000 estate will be less than the sum of her estate tax exemption, $6,000,000, and the unused exemption she can use from Steve, $5,060,000.
Light: What about when the surviving spouse remarries? How can he or she take advantage of what you’ve been talking about?
Bell: This is called portability, and it’s not available in all circumstances. The unused estate tax exemption of a decedent cannot be used by the decedent’s surviving spouse if the surviving spouse enters into a remarriage.
Light: And the exception?
Bell: A wealthy surviving spouse who does remarry may benefit from estate tax portability by making lifetime gifts to children or other beneficiaries before the remarriage occurs. The surviving spouse’s use of some or all of the deceased spouse’s unused estate tax exemption during lifetime is an effective use of portability.
Light: Any restrictions on this feature?
Bell: Taxpayers should be mindful that the portability option is available for federal estate tax purposes, but may not be available on the state level. Of the minority of states that still impose an estate tax upon death, some allow portability for state estate tax purposes, while others do not.
The estate tax portability rule is a post-mortem planning option. In many cases, married taxpayers have not engaged in proper tax planning during their lifetimes and must rely on portability to avoid estate taxes on the deaths of both spouses. While the estate tax portability rule is a powerful planning tool, it is not a substitute for proper lifetime planning.