Tax Saving Strategy
By Kevin Eggebraaten
An estate that elects portability is required to file an estate tax return (Form 706) even if the estate has a value less than the current 2015 threshold of $5,430,000 under Section 6018(1). Portability is elective(2), rather than automatic, and refers to the ability of a surviving spouse to inherit the unused Federal estate tax exemption of a predeceased spouse. Why is this important? Let’s look at an example.
If Kevin & Renee are married and have a net worth of $7,000,000 (Kevin - $3,000,000 and Renee $4,000,000) and Kevin passes away, there will be no estate tax due on death. Filing Form 706 for portability purposes allows for Renee to avoid possible estate tax issues after her death.
In our example, if the executor of Kevin’s estate makes a decision to file for portability this allows Renee to avoid estate taxes on the first $7,860,000 of her gross estate upon her death. The $7,860,000 is made up of $5,430,000 of her unused exemption as well as $2,430,000 portability election known as DSUE.
So, if all of Kevin’s net worth passes to Renee, her net worth would be $7,000,000 and she has available to her $7,860,000 of exclusions. If her net worth does exceed $7,860,000 at her death, then her estate would not owe any income tax in our example.
What if she lives another 5 years and now she is worth $10,000,000. Renee’s estate would owe estate taxes on $2,140,000 less any inflation adjustment for her unused exemption. On $2,140,000 of taxable estate her estate would owe over $800,000 in estate taxes based upon the current law.
Can this possibly be avoided? Let’s assume that Renee remarried and her new spouse’s name is Rick. One planning opportunity, and there are many, would be to gift the remaining DSUE / Portability amount of $2,430,000 of the last surviving spouse (Kevin) to the beneficiaries. She would need to file a gift tax return to account for this gift. In other words, Renee doesn’t lose the DSUE / portability amount from Kevin until Rick dies for gift tax purposes, since it is deemed to be the last surviving spouse’s death. Depending on Rick’s net worth, this could save Renee’s estate close to $1,000,000 in estate taxes. (2,430,000 * 40% = $972,000). If Renee doesn’t take advantage of gifting the DSUE amount from Kevin’s death prior to Rick’s death the opportunity will be lost.
Estate planning can be very complicated and there are many other planning opportunities that potentially need to be discussed with your attorney and tax advisor to assure compliance and see if there may be some tax saving opportunities. Remember it is not “how much you make” but “what you get to keep or pass on” that matters.
Kevin Eggebraaten is a Certified Public Accountant with Casey Peterson & Associates