Surviving Spouse Estate Tax Exclusion


What is an Estate Tax?

The estate tax is a tax on the transfer of property after a person dies. It consists of an account of everything the decedent owned or had interest in on the date of death. This includes cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets. The tax is based on the fair market value of these assets (less certain exclusions). This is generally as of the day the decedent died.

What is the Lifetime Exclusion for Smaller Estates?

An inflation-adjusted lifetime exclusion prevents the taxing of smaller estates. This exclusion is $5,450,000 for 2016. I know. How many of us have THAT kind of money. Surprise! It adds up. That amount is adjusted (reduced) by the value of untaxed gifts that the decedent gave in excess of the annual gift exemption. That exemption is currently $14,000 over his or her lifetime. Thus, if the value of all the decedent’s property is less than the adjusted exclusion amount, there would be no estate tax. And, generally, no need to file an estate tax return. However, filing an estate tax return when it wouldn’t be needed may benefit the surviving spouse when the decedent was married.

What If I am the Surviving Spouse of An Estate?

Let’s say the spouse survives a decedent. The decedent’s estate is worth less than the adjusted lifetime exclusion. The estate of the decedent may elect to pass any of the decedent’s unused lifetime exclusion to the surviving spouse. Considering that estate tax rates currently range from 18 to 40 percent, this can be very beneficial if the estate of the surviving spouse could exceed the adjusted lifetime exclusion when he or she subsequently passes.

Example – A husband with an estate valued at $2 million died in 2014. He made prior taxable gifts of $1 million. Even though there was no estate tax return filing requirement, the decedent’s spouse filed one to claim the election to pass the decedent’s unused lifetime exclusion to his spouse. The husband’s unused exclusion amount was $2.34 million, which is the 2014 estate tax exemption of $5.34 million minus the $1 million in prior taxable gifts and the $2 million value of his estate. His spouse can then add his unused exclusion to her own. Let’s assume the spouse has made no taxable gifts. Let’s say she passes in this year. Her estate’s exclusion amount for 2016 would be $7.79 million – her $5.45 million basic exclusion amount plus $2.34 million of her spouse’s unused exclusion amount.

What is the Portability Election?

For the surviving spouse (or estate) to claim the deceased spouse’s unused exclusion amount, the estate of the first spouse to die must make an election. This is referred to as the portability election. This is done by filing a timely estate tax return. The estate tax return must include a computation of the unused exclusion amount. This is true even if the value of the estate is not enough to require the filing of an estate tax return.

This presents a quandary for the executor (or other representative of the estate, often the surviving spouse). They must decide if it is worth the cost to prepare and file an estate tax return. Especially when there is no requirement to do so outside of making the portability election. Keep in mind, estate tax returns are quite complicated and expensive.

What Should I Think About When Planning an Estate?

When making this decision, an executor needs to carefully consider the likelihood of some things. One is the surviving spouse’s estate exceeding the adjusted lifetime exclusion amount. Another factor to consider is Congress. In the past, Congress has changed both the lifetime exclusion amount and the estate tax rates.

Where Does Congress Stand on Estate Issues?

This topic seems to be a constant subject of discussion in Washington. There are no guarantees that the exemption will remain at its current level. If the executor is not the surviving spouse, he or she will ideally consult with the widow(er) on the decision, but this is not a requirement. This could pose a problem if there is animosity between the executor and the surviving spouse. It is a good idea to include language in the couple’s wills or trusts that will require the executor to make the portability election. Doing so helps to avoid the situation of someone other than the spouse acting as the executor of the estate for the first spouse to die.

Do You Have Questions Regarding this Election

If you have questions related to this election, the lifetime exclusion, the annual gift tax exemption, or estate planning in general, you are not alone. Our office can help you make this decision and advise you to the best solution. You may have inherited a piece of real estate you that has the potential to generate income as a rental. Give Alex Franch, BS EA a call at 781.849.7200. He knows the tax codes. Alex has a strong team of educated and experienced professionals who can advise you can maximize your tax credits. You may leave a comment below or go to our Facebook or Google Plus pages.

For more information, call Alex Franch at 781.789.7200. WorthTax has locations in Norwell, Dedham, and Weymouth, Massachussetts.
Alex Franch

Mr. Franch is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Mr. Franch is an Enrolled Agent and has eight years of tax preparation experience. He has been serving individuals, families, and businesses for several years with tax and financial planning strategies and is a junior partner with the firm. Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA) with a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.

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