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Estate Planning

The official Frantz, McConnell, and Seymour, LLP blog.

BETTER SAFE THAN SORRY…ALWAYS A GOOD IDEA TO FILE FORM 706

BETTER SAFE THAN SORRY…ALWAYS A GOOD IDEA TO FILE FORM 706

No one has a crystal ball, but that does not mean we should not keep our eyes and ears open.  Given the drama surrounding the 2016 presidential election, there is one certainty…there could be some MAJOR changes in the federal estate tax regardless of who wins the election.  Mr. Trump’s plan proposes to nearly eliminate the federal estate tax (taxing only capital gains held on the date of death over $10 million) whereas Mrs. Clinton’s plan proposes to restore the federal estate tax to 2009 level (a $3.5 million exemption) with an increase in the tax rate.  I have been asked on multiple occasions how a change such as this would affect “Portability” under the 2013 American Taxpayer Relief Act. 

Right now, for married couples, when the first spouse passes away, if he/she transfers all assets to the surviving spouse, he/she uses none of the $5.45 current (2016) estate tax exclusion amount.  Without electing for portability of the deceased spouse’s unused exclusion (DSUE), that tax-free $5.45 million transfer is lost.  The surviving spouse is then only able to transfer $5.45 million on his/her death (currently indexed for inflation) free of the federal estate tax.  If portability of the DSUE of the first spouse to die was elected by filing a Form 706 federal estate tax return, the surviving spouse could then transfer a total of $10.9 million ($5.45 DSUE + $5.45 surviving spouse exclusion). 

Estate Administrators and surviving spouses are currently faced with this very important decision—do I pay for professional help to elect portability by filing Form 706 or save some money now by not incurring that cost and hoping that the federal estate tax exclusion amount remains high enough (or is nearly eliminated) that they will have no need for the DSUE amount?  For a married couple (John and Jane Doe for example) who combined holds $4.5 million in assets, the decision not to file a Form 706 for the first spouse to die seems justified.  Why spend the money when the current federal estate tax exclusion is $5.45 indexed for inflation (and given president-elect Trump’s proposed plan to nearly eliminate the estate tax)?  Because laws change, the clear evidence of which is the drama surrounding the 2016 presidential election. 

In our example, if John Doe passed away on January 30, 2016 and left everything to his wife, Jane Doe, Jane (we’ll assume she was appointed as the Administrator of John’s estate) might elect not to spend the money to file Form 706 for John’s Estate to elect portability, banking of the current law allowing her to transfer $5.45 million tax-free.  Next year (2017), if one presidential candidate’s tax plan is passed and the exclusion is decreased to $3.5 million, Jane’s estate is now taxable; if she were to die after the effective date of such change, $1 million of her $4.5 million Estate (likely more if her assets increased in value) could end up owing around $400,000 in federal estate tax (based upon a 40% tax rate, that may change as well)!  If she had only elected portability of John’s DSUE amount by filing Form 706 within 9 months of his death in 2016, she would have had the ability to transfer at least $8.95 million ($5.45 million DSUE from John + $3.5 million under what could be the current law after the 2016 presidential election) tax-free!  Instead, a $400,000 check is written to the IRS. 

This result is not limited to changes in the law—the economy has performed well the last few years.  Many individual’s net worth has increased, and since we can’t accurately predict the future, it is better safe than sorry when it comes to electing portability.  File that Form 706 to keep that extra $5.45 million+ exclusion “in the bank” to avoid sharing more of your family’s money with Uncle Sam (or Uncle Trump or a future president-elect, you can’t predict how the law may change in this or in future administrations)!

If you would like to speak to Kevin Dean on this or any other matter, he may be reached at (865) 546-9321.

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