The generous ruling is both estate and gift tax-free for married couples who have not set up expensive trusts prior to death.
The Advantages Of The New Rules
For several decades, married couples were at risk of losing one of their two estate tax exemptions if they did not establish trusts before they died or pass property outright to a non-spouse. However, as some high net worth couples may not have the ability to set up one of these estate trusts, the new rules allow for spouses to conduct post-death planning to ensure their estates are intact.
This is significant because although these exemptions have been available for couples, the new rules allow couples to leave all their assets to their spouse without losing one of the two exemptions. Prior to these new estate exemptions, individuals could only leave half as much money, but now with the special election after death, individuals can preserve the value of the second exemption. This is significant because each exemption is $5.43 million, which means that only 4,000 families
will be required to pay estate taxes this year.
The Portability Rules
According to the new rules a spouse can elect "portability" after their spouse dies, and the unused $5.43 million exemption carries over to the surviving spouse. This portability gives the surviving spouse a tax shelter to pass on assets to their heirs while also expanding the exemption total to $10.86 million. The importance of these new rules also benefits surviving spouses who receive a windfall from the lottery, inheritance or remarriage to someone with substantial assets. Furthermore, these new portability rules allow surviving spouses to carry over the unused exemption from their deceased spouse into their next marriage, providing a spouse potentially three exemptions provided the surviving spouse uses the exemption of the deceased spouse before the death of the new spouse. If the new spouse dies before the surviving spouse, the surviving spouse may not use the exemption the deceased spouse from the first marriage. The first spouse's unused exemption may only be used by the surviving spouse, as it cannot be passed on to a new spouse from the second marriage.
The exemption may protect more estates from paying estate tax
, but the increase in income tax rates, especially those for capital gains, compels estate planning that will provide the heirs with a step-up in basis in order to negate capital gain taxation. Many of these plans are as complex as those used before portability.
Although there are significant benefits, individuals must file an estate tax return to elect portability, even if the estate is below the exemption. The new rules also required that these returns be submitted within nine months of death. According to Don Williamson, Executive Director of the Kogod Small Business Tax Center at American University, this has the potential to be overlooked.
"This is a very real problem," Williamson commented. "Not opting for portability can shortchange the survivor and can put the executor at risk of being sued."
However, the IRS reported these new portability rules are expected to increase the number of federal estate tax filings for 2015.