Why it may be advisable for a surviving spouse to file an estate tax return for a non-taxable estate

Current federal estate tax law entitles a surviving spouse to retain the unused portion of the deceased spouse's unified estate and gift tax exemption. The 2010 Tax Relief, Unemployment Insurance Reauthorization &  Jobs Creation Act introduced this so-called "portability" option. It was extended in 2013.

A spouse may pass assets in any amount to a surviving spouse who is a U.S. citizen, free of estate tax. However, even if the decedent's estate is not taxable and an estate tax return (Form 706) is not required, a return must be filed in a timely manner with the portability option elected in order for the surviving spouse to retain the decedent's tax credit. (Note: A spouse who remarries loses the credit, even if he/she has elected it.)

Here's an illustration of how portability can impact a surviving spouse's estate tax liability. For the purposes of this example, I am assuming a unified gift and estate tax credit of $5.25 million, the current figure. Let's say a man dies with a $5 million estate and leaves it all to his wife. He has done no gifting and thus he has left untouched his full $5.25 million estate and gift tax credit.  His wife has $4 million of her own assets and she, too, makes no gifts that are taxable during her lifetime. She dies several years later, leaving an estate of $10 million. 

• If she elected portability at her husband's death: Both his tax credit and her own are applied to her estate when she passes away. That's a total exemption of $10.5 million. Since her estate is $10 million, no taxes are owed and the entire amount passes to heirs tax-free.

• If she did not elect portability at her husband's death: She is entitled to only her own tax credit, $5.25 million. Thus, $4.75 million ($10 million minus her own $5.25 million credit) is taxable. Her estate will have to pay Uncle Sam 40% of that amount, or $1.9 million. 

When determining whether to elect portability, the survivor's age and finances must be considered. In the above example, if the survivor was in her late 80s and had only modest assets, it is unlikely her own estate would ever be taxable, short of her winning the lottery. Therefore, filing a 706 to retain her husband's estate tax credit would probably not be worth the expense or bother. If on the other hand the survivor was much younger and/or had significant assets, it is possible that over the course of her lifetime she might accumulate assets sufficient to leave a taxable estate. That scenario presents a more compelling case for preserving the decedent's tax credit for future use by the survivor. 

Of course, whatever the age of the survivor or value of assets involved, in the interests of prudence, some surviving spouses might want to file the 706 and elect the portability option even if the chances of future benefit is marginal. It's a decision every surviving spouse should make with input from the lawyer during the probate and/or trust administration process.

Also, although the current tax credit of $5.25 million means the average person's estate is not taxable, it's important to remember that that figure is not set in stone. Prior to the Bush tax cuts, the lifetime exemption was $650,000. Despite the so-called "permanency" of the new estate tax, it can always be modified, and indeed there are rumblings in Congress about just that. Any reduction in the lifetime estate tax credit makes it increasingly important for the survivor to retain the deceased spouse's credit for possible future use.

Contact The Karp Law Firm's Florida estate planning lawyers for assistance. In addition to the firm's attorneys, a Certified Public Accountant is on staff with vast experience in this area.