Using Your Deceased Spouse’s Unused Federal Estate Tax Exemption

Most people have heard of death taxes and wanting to avoid the government from taking any money from their estate when they die. This is usually for one single reason, the individual wants these assets to benefit their children and their family when he or she is gone. However, in actuality, most Tennessee residents do not need to worry about the federal estate tax. 

The federal estate tax only applies to approximately 1% of estates. The main reason is that the federal estate tax only applies to estates that have a gross value of $5.25 million or higher on the date of death. In addition, if you are the surviving spouse, you have the ability to use the unused exemption of your deceased spouse to increase your exemption from the federal estate tax. 

This is referred to as portability. This estate tax concept was made permanent with the passage of the American Tax Payer Relief Act. Essentially, portability refers to the surviving spouse using the unused estate tax exemption of the earlier deceased spouse. What I mean, is that an election can be made to transfer the unused portion of the deceased spouse’s federal estate tax exemption to the surviving spouse, thereby increasing the surviving spouse’s estate tax exemption. 

For example, let’s say that John and Jane have been married for over 20 years, have an estate plan, and have a revocable living trust. When John dies, his assets total $2 million in value. Therefore, John would have $3.25 million of the federal estate tax exemption that would be unused and wasted on the date of his death. However, John and Jane made an election where by the unused $3.25 million exemption from the federal estate tax was transferred to Jane to provide her with a total of an $8.5 million exemption from the federal estate tax. 

Now, this was very beneficial for Jane, because Jane ended up living for another 25 years, and died with a gross estate of $8 million. If John and Jane had not planned and used portability of the federal estate tax exemption, then $2.75 million of Jane’s gross estate would be subject to the federal estate tax. Now, under the current federal estate tax regime, this would mean a federal estate tax obligation of $1.1 million, or 40% of the gross estate above the federal estate tax exemption. 

Therefore, by simply engaging in proper estate and tax planning, John and Jane avoided a $1.1 million estate tax obligation through the use of portability. 

However, the use of portability and estate tax planning can be very complex, and if you do not plan just right, you may end up paying federal estate tax for not electing portability during the applicable time limitations.

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