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Just a few weeks ago, the IRS did something it almost never does – it extended the deadline for filing Federal estate tax returns when filed for purposes of portability.  Instead of the typical 9-month deadline, estates can now file portability returns up to 5 years after the decedent’s death.  Why is this a good thing?  Read on.


In 2017, as part of the Tax Cuts and Jobs Act, the Federal estate tax exemption was raised from $5.6 million to $11.2 million.  The effect of the change was that less than .1 % of Americans owed any Federal estate tax.  And the IRS received far fewer returns.  But that exemption is temporary.  It will expire at the end of 2025, at which point the exemption will return to $5.6 million (adjusted for inflation).  As a result of the automatic reversion back, if someone dies after 2025, and leaves more than $5.6 million behind, estate taxes will be owed, starting at 40% of any amount over the permitted exemption.


Which brings us to the American Tax Relief Act, signed into law in 2013, which permitted a married couple to share their respective exemptions – essentially meaning that estate tax would not be owed unless the couple’s combined net worth exceeded the permitted exemption times 2.  It works like this:


Husband dies leaving all his assets to his wife.  No estate tax is owed because assets passing to a spouse qualify for the “marital” exemption.  No Federal estate tax return is required when the first spouse dies.  But if, in our example, husband and wife’s combined assets are 8 million, when the wife later dies (assuming the second death occurs after 2025), her estate will owe $960,000 in Federal estate tax.


But filing a Federal estate tax return on the death of the first spouse can fix that.  As stated above, because ALL the husband’s assets passed to his wife upon his death, husband used NONE of his Federal estate tax exemption.  If his estate files a Federal estate tax return, he can pass his unused exemption (for purposes of this newsletter, we will say $11.2 million) to his wife.  This means that when the wife dies, she has her own exemption (let’s call it 5.6 million because that is what the law will be at the end of 2025) plus her late husband’s exemption and can die with as much as 16.8 million without any estate tax, saving $960,000 that would otherwise be owed.


The new extension gives a reprieve for anyone dying after 2017 who assumed that since the estate tax exemption was so high, there was no good reason to file a federal estate tax return.  Portability is that good reason.  Keep in mind, just because the law will revert back to 5.6 million at the end of 2025, doesn’t mean that it will stay at that level.  Last summer, legislation was proposed to lower the permitted exemption to $3.5 million.  Between 2002 and 2010, the permitted exemption was just $1 million.  Having an extra “emergency fund” of up to $11 million of estate tax free inheritance could be a valuable safety net if the exemption amount is reduced in the years to come.


If you want to learn more about portability filings, please call.


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