For example, let’s assume that Harry and Harriet each have $5 million in their respective names. Harry dies and his will leaves his entire estate to Harriet. His $5.25 million dollar exemption is unused since bequests to a spouse pass tax-free. If Form 706 is filed and portability is elected, Harriet will now have a $10.5 million exemption. What makes it even more worthwhile is that Harriet now has choices: She can make gifts during her lifetime of up to $10 million without any gift tax consequence. When she dies the first $10 million (or remainder if some was applied to gifts) will not be subject to federal estate tax, regardless of to whom she leaves her assets.
Now you might ask why worry about filing a Form 706, if between both spouses total assets are way under the $5.25 million threshold.
Let’s suppose that Samantha, who has $1 million in her name, dies and leaves her estate to Sam who has $2 million in his name. Should Sam file a Form 706 for Samantha’s estate to preserve the DSUE, the unused exemption, even though his total estate will only be $3 million, not anywhere near the $5.25 threshold? Yes -and here’s why…
- No one knows the future, and Sam’s wealth could increase during his lifetime. If his total assets increase over the federal threshold, he would be able to use the DSUE to pass on additional assets free of federal gift or estate taxes.
- There is talk in Washington of lowering the threshold amount. Regardless of any changes, once a Form 706 is filed, the DSUE amount is preserved, increasing the amount Sam can pass on free of federal estate taxes.
- Even if Sam decides to remarry, he would be able to preserve the DSUE (as one keeps the DSUE from the last deceased spouse), allowing Sam to gift or bequeath assets to others (up to the amount of the DSUE) free of federal gift or estate taxes.
Here’s what Harriet and Sam, the surviving spouses, need to remember…
In order to claim portability a Federal Estate Tax return (Form 706) must be filed even if the estate falls under the 2013 threshold of $5,250,000. No special schedule or election need be made. Simply filing the Form 706 elects portability. If an extension of time is required, fifteen months is given to file the Form 706 (nine months from date of death plus the six month extension). The Executor, not the spouse, is responsible for filing the US Form 706.
So while filing an extra tax form might seem annoying, it certainly can be worthwhile.