Congress Converted Your Federal Estate Tax “Exemption” to an Asset You Can Transfer.

As a result of legislation enacted last December, each of us has a federal estate tax “exemption” of $5,000,000. The first reaction of many might be, “So what? I have nothing to tax anyway. This means nothing to me.”

If you are married at the time of your death, however, your $5,000,000 estate tax “exemption” can be transferred to your surviving spouse. As a result, your surviving spouse could have an “exemption” of as much as $10,000,000 (your spouse’s “exemption” plus your “exemption”). Potentially, your “exemption” could save a surviving spouse from $1,500,000 to $2,500,000 in federal estate taxes.

To transfer your “exemption” to your surviving spouse, your Executor must file a federal estate tax return by its due date (nine months after your death unless an extension is requested). If your Executor fails to file the return and make the election, the opportunity to transfer the exemption to your surviving spouse is lost. Problem:  As of July 25, 2011, the IRS has not issued an estate tax return form that includes the election.  Executors of decedents who died early in 2011 should consider filing, before the due date for the return, a request for an extension of time to file the return to preserve the ability to make the election.

Not only will the new portable exemption be a new and useful estate planning tool, the “exemption” probably will be considered when negotiating many prenuptial agreements. It is not a stretch to imagine the lawyer of the wealthy groom-to-be asking his client’s betrothed to make certain her Executor will make the “exemption” election after her death.

It is also not too much of a stretch to think that some wealthy bachelors and bachelorettes may seek out singles with unused “exemptions,” short life expectancies, and no assets, as ideal marriage partners.

Look at it from this slightly different perspective. Imagine that your spouse passes away this year with no assets. You (the surviving spouse) expect to receive a large inheritance in the future when your parents pass away. The inheritance from your parents will push the size of your estate well above $5,000,000 (the size of your exemption).

In such a case, the exemption of your deceased spouse would be very important in shielding your estate (augmented by the inheritance you receive from your parents) from estate taxes at your death; and, as the Executor of your spouse’s estate, you should file a federal estate tax return within nine months after your spouse’s death to claim your spouse’s unused exemption even though your spouse’s estate has no value at all.

The current federal estate tax rules, including the rules relating to the portable exemption, are temporary and are scheduled to expire on January 1, 2013. Estate planners expect Congress to act to prevent expiration of the current rules or to enact different rules. In the meantime, while waiting for Congress to give us a permanent set of rules, it makes sense to take steps to preserve the portable “exemption” for the surviving spouse by filing estate tax returns for the estate of the deceased spouse even when the estate has no value.

Posted on 7/9/2011 by Richard S. Land, Member,  Chipman, Mazzucco, Land & Pennarola, LLC.

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Notice: To comply with U.S. Treasury Department rules and regulations, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction, tax strategy or other activity.

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