Don't Lose $2,196,000 To This Estate Tax Trap!

July 2017
Personal Finances Estate Planning

The estate tax exemption now stands at $5,490,000 per spouse. Accordingly, a married doctor can pass almost $11 million ($10,980,000) in assets to his children or other beneficiaries estate tax free, if properly structured.

Under prior law, doctors needed to equalize assets between themselves and their spouse, and use complex trusts in order to assure that they could pass the maximum amount of assets tax-free. Otherwise, if the non-doctor spouse, who had only $1,000,000 in assets died first, leaving the doctor surviving with $10 million in assets, the estate tax exemption amount remaining for the non-doctor spouse of $4,490,000 ($5,490,000 minus $1,000,000) would be forfeited.

In 2010, Congress passed a portability election rule, allowing the surviving spouse to elect to utilize the unused portion of their deceased spouse’s estate tax exemption. Most doctors are under the impression that estate planning is less important now, since they won’t have to pay federal estate taxes if the couple’s net worth is below $11 million. Accordingly, many doctors have simply decided to forgo complex trusts in favor of setting up “sweetheart wills,” leaving all assets to their surviving spouse.

These doctors (and their advisors) further assumed that if their estate was not over the $5,490,000 exemption amount, there was no need to file a federal estate tax return, since no taxes were due. That’s not the case, says Blake W. Hassan, CPA JD, an estate planning expert with McGill and Hassan, P.A.* In order for the surviving spouse to use the unused exemption amount at their death, an estate tax return must be filed, and a portability election made, when the first spouse dies, he adds.

Since 2010, hundreds of executors have realized their mistake in not filing an estate tax return (Form 706) to make the portability election, and have asked the IRS for relief from the missed deadline. In recently published Revenue Procedure 2017-34, the IRS has agreed.

Under the new procedure, executors for estates of those dying from January 1, 2011 to January 2, 2016, have until January 2, 2018 to file an estate tax return and make the portability election. The IRS will generally approve the late filing, as long as the estate wasn’t legally required to file a return (due to having assets in excess of the exemption amount), and simply didn’t file one. Executors for estates of those dying after January 2, 2016 have two years from the date of death to file an estate tax return and make the portability election.

Losing the deceased spouse’s unused exemption amount can cause doctors to pay up to $2,196,000 in unnecessary estate taxes ($5,490,000 wasted exemption x 40% estate tax rate). Accordingly, Hassan recommends including a provision in each spouse’s will directing the executor of the estate to file the Form 706 and make the election. As an added safeguard, place a copy of this article with your estate planning documents (wills, trusts, etc.) to make sure that your executor (normally the surviving spouse) doesn’t overlook this important tax benefit at a huge cost to your family.

* McGill and Hassan, P.A. specializes in providing legal services such as estate planning to dental professionals. For more information, call 704.424.5450.


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