No More Taxes: Don’t Forget to Jump Through the Hoop

We recognize that far fewer individuals who pass away in 2013 will be required to file federal estate tax returns, with the AEA (Applicable Exclusion Amount) at $5.25 million, (before the increase of $90,000 next year to $5.34 million, per person).  Don’t  forget, however, that the AEA remaining to protect the inheritance will be reduced by taxable gifts made during life.

Of course, married people can protect twice as much-either through careful planning with trusts (recommended, for many reasons), or through “portability”, the excellent (and long delayed) new tax break which allows the AEA of the spouse who dies first (the “predeceased spouse”, or PD) to “port” or pass over to the surviving spouse, to supplement their own AEA.  This tax benefit is called the DSUEA, or (deceased spouse unused exclusion amount).  This tax benefit, amazingly, passes to the surviving spouse even to the extent that it exceeds the actual inheritance passing from the PD.  So if the PD passes $1 million to the surviving spouse (SS), and we assume no lifetime gifts were made, the SS will have a total AEA of $10.5 million.  

It’s important to keep in mind that:
1) The DSUEA amount is fixed at the time of death and does not grow with inflation-but the AEA of the SS continues to grow with inflation.  Planners are working to take account of this.
2) Gifts to the heirs (in a Dynasty “Grantor” Trust for income tax purposes) made by the surviving spouse promptly after the death of the PD is a wonderful planning tool, and should be on the priority list of advisors.

The Problem, and the Warning:
The surviving spouse needs to make sure someone files a US Federal Estate Tax Return Form 706, to use the DSUEA. File, or lose it! Vince Lackner was kind enough to compute, that:
There are 975,424 federal estate tax returns that should theoretically be filed every year solely to protect the unused exclusion amount of every person who was married at death, calculated as follows:
U.S. population (2012): 313,847,500
Rate of death per thousand: 0.89%
Number of deaths in the United States in 2012: 2,633,181
Percent of all decedents married at time of death: 37%
Number of all decedents married at time of death: 977,274
Number of married decedents with estates > $5,250,000: 1,850 (5,000 x 37%)
Number of married decedents with estates ≤ $5,250,000: 975,424

Any surviving spouse could win the lottery, inherit a large amount, or receive a large settlement from an accident. If the predeceased spouse’s estate did not elect to preserve the DSUEA on a timely filed return, then this exclusion may not be used by the surviving spouse. If the predeceased spouse owned nothing, this could represent an increase in tax of $2,100,000 ($5,250,000 x 40%).

The Will Doctor is trying to imagine the SS (step mom), trying to convince her step children to file an estate tax return which costs a few bucks, and must be fully completed.  Hope they like her!  We are putting clauses in appropriate wills and trusts to help that process along.

Posted in Planning Opportunities, The Tax Environment, WillPlan Blog.

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