There is no doubt we live in strange times. As tax and business advisors, we are all asking what is the likelihood of the Senate of the White House going Democratic? And if there is a wholesale turnover, what happens to the economy and the tax rates? That is anyone’s guess. However, one thing we do know, if both houses of Congress and the White House are all in Democratic hands, the tax picture will likely look very different. We are already planning with clients whose assets exceed the current federal exemption equivalent ($11.58 MM pp or$23.16 MM joint). But what about the client who has lost a spouse and whose joint assets are in the under $10 MM range?
This is where caution should be exercised. By now we have all heard of “portability” in estate planning. That means that the surviving spouse can elect to use the deceased spouse’s unused exemption as their own, by making gifts during life or upon the second spouse’s death. But to elect to do so a US Estate Tax form 706 must have been filed within two years of the death of the first spouse. So why is this so important now?
Suppose the tax rules are changed and each person instead of having an $11.58 MM exemption, now has a reduced exemption of say, $5 MM. And let’s say a surviving widow’s husband passed with a $4 MM estate. The surviving widow has an estate of $3 MM of her own and when combined with her husbands, a gross estate of $7 MM. If the exemption limit is lowered to $5 MM prior to the widow’s death, then the widow will have a tax to pay on $2 MM. The estate tax rate may also change, but even at today’s rates (.40) the federal tax on $2 MM would be $800 K. That is money your heirs will never see.
Now the solution. If your spouse has died within the past two years, you should make a retroactive portability election and preserve the extra exemption. By making that retroactive election, at least the amounts in the deceased spouse’s estate will be exempted from taxation in the surviving spouse’s estate if there is a change in the federal gift and estate tax exemption.
If you would like help making the retroactive election, please feel free to call the estate tax lawyers of Thomas & Libowitz, P.A. at 410-752-2468.