Losing a spouse is one of the most heartbreaking experiences anyone can go through. Amidst the grief, handling complicated financial and tax matters is likely the last thing you want to think about.
However, filing one important form can make a massive difference for your family’s financial future. Especially if your family has a large estate.
A surviving spouse can claim their deceased partner’s unused federal estate tax exemption. In the estate planning world, this is known as "portability."
Here’s how it works:
Currently, the federal estate tax exemption is $15 million. If a husband dies with an estate of $10 million and leaves everything to his partner, no federal estate tax is due because the estate value is below the $15 million threshold. But his partner can claim the remaining $5 million exclusion.
When the surviving spouse passes away, up to $20 million can pass to the couple’s heirs tax-free.
The actual exemption amount can vary depending on the estate, lifetime gifts and other factors. Also, the exclusion applies to federal taxes only. Individual states have a variety of estate tax laws. A financial advisor or tax professional can provide additional information.
IMPORTANT: The surviving spouse must take action to preserve the unused exemption. The deceased spouse’s unused exclusion (DSUE) is not transferred automatically.
The executor must file IRS Form 706 and elect portability of the unused exemption within nine months of the spouse passing away. The portability election does not happen automatically. Simply leaving assets to a surviving spouse is not enough.
Not necessarily. It depends on the size and nature of the estate, estimated asset growth, lifetime gifting plans and other factors. A financial advisor can help you make an informed decision.
It’s worth considering, even if an estate is well below the federal estate tax exemption. Assets can grow substantially over time, and tax laws can change.
An estate can include:
Additionally, by filing Form 706 and electing portability, any asset included in the marital deduction calculation receives a step-up in cost basis at the first spouse's death and again following the death of the second spouse. It’s another way to potentially save your heirs thousands of dollars in capital gains taxes.
All too often, widows and widowers miss out on this massive tax-saving opportunity simply because no one told them a form needed to be filed. For example, when reviewing a new client’s financial situation, we learned her spouse had recently passed away.
Form 706 wasn’t filed because his estate was below the $15 million threshold. But the family assets were such that the tax exemption could be beneficial in the future. We were able to file Form 706, potentially saving the family millions of dollars in future taxes.
Here are a few common questions we hear from clients:
If you’ve lost a spouse and aren't sure whether a portability election was made, check with your tax preparer. An extension of up to six months may be available. More information is available on the IRS’ estate tax FAQ page.
The rules here can be a bit tricky. The law says you can use only the unused exclusion from your most recently deceased spouse. If you remarry and your new spouse outlives you, you keep the unused exclusion from your first spouse. But if you remarry and your second spouse passes away before you do, you lose the first spouse's unused exclusion and can only port over whatever tax exclusion remains from your new spouse’s exemption.
Yes. A surviving spouse can generally use an available DSUE amount when making taxable gifts during their lifetime, as well as when assets are transferred at death.
This means portability can be useful for more than just reducing a future estate tax bill. It can also be part of a broader lifetime gifting strategy.
Navigating estate taxes and financial planning after the loss of a loved one can feel overwhelming, but you do not have to handle everything on your own. Our friendly, caring and experienced team can help you protect your family’s wealth and secure your financial future.
If you have questions about estate taxes, Form 706, or your overall financial plan, please contact us online or by phone (415) 541-7774.
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The client example above reflects the experience of a particular client and is provided for illustrative purposes only. Estate planning strategies and the resulting tax or probate savings depend on each client's unique financial circumstances, applicable law, and individual objectives. There is no guarantee that other clients will achieve similar results.
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