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If you have between $2-12M and die before 2026, your spouse should know this

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Aug 13, 2018
Just watched this video about the upcoming change in estate tax rules in 2026, specifically Treasury Regulation Sect 20.2010-1 (c) (2) iii and Portability.

Following this advice could save your kids millions of dollars in taxes on your estate.


My recap from the video:

In 2020, the federal estate tax basic exclusion amount is $11.58 million. In 2026, the federal estate tax basic exclusion amount sunsets back to about $6 million ($5 million adjusted for inflation).

The estates of people who died in 2020 are not required to file a federal estate tax return if their gross estate is less than $11.58 million.

But let's play out a scenario and see how that works out.

Barry dies in 2020 and leaves his whole estate to his wife, Pam.

His estate is valued at $6M.

Barry & Pam had a total combined estate of $12M, but Barry's estate is worth $6M.

Pam goes to see the lawyer to settle the estate.

This can go one of two ways.

Wrong Way:
The lawyer says, "Barry's estate was $6M, and for people who die in 2020, the first $11.58M is exempt from the estate tax. Since Barry's gross estate is less than the exclusion amount, we don't have to file an estate tax return and you don't owe any estate tax. We're not required to send any information to the IRS about Barry's estate.

Now Pam has $12M.

Pam lives for 6 more years, and she dies in 2026, when our basic estate tax exclusion amount has reverted back to $6M.

Pam's estate has also grown to (let's call it) $17.58 M.

Pam's kids go to see the estate lawyer.

The lawyer checks the estate tax exclusion amount, and it's $6M in 2026, so $11.58M is subject to the 40% tax.

Therefore, the kids have to cough up a check to the IRS for $4,632,000.

That's a lot of money.

Better way:
Pam goes to see the lawyer, and she asks the lawyer make sure that they make an election for "Portability."

While there is no requirement that an estate tax return be filed on Barry's behalf (because his gross estate was less than the $11.8M exclusion amount), in order to take advantage of the portability election, it has to be filed in a timely manner (within 9 months after Barry's death).

Making the portability election will do the following:

When Pam dies, perhaps in 2026, then her estate, which could be worth $17.58M at that time, will get to take advantage of Pam's $6M basic exclusion amount, AND take advantage of Barry's $11.58M exclusion amount that Barry's estate didn't utilize.

That way, Pam can exempt $17.58M from the 40% estate tax instead of just $6M.

And Pam's kids have a tax bill of $0.

The failure in Scenario 1 to file the estate tax return and make the portability election when Barry died cost that family $4.6 million of unnecessary estate tax that shouldn't have had to have been paid.

So if you die before 2026, and you have between $2-12 million in your estate, and you leave it to your spouse, and your spouse could live past 2026, this is worth knowing.

To do this, look up Treasury Regulation Sect 20.2010-1 (c) (2) (iii) to check on this, and file the IRS Form 706.

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Platinum Contributor
Read Millionaire Fastlane
Summit Attendee
Speedway Pass
May 2, 2017
Candidly, I'm hoping if someone's estate is worth millions, they have already consulted with a professional (lawyer, accountant, etc) ;)

However, that does not discount the fact that this is excellent information.

It's also an excellent reminder that tax laws are not permanent. Not only can they be changed (and frequently are), but many of the major changes made in 2018 and 2020 do have sunset periods, especially for individuals.
Historically, these often get extended since it's politically popular to do so, but there's no guarantee.

If you think you will be over the threshold in the future (especially with rapidly-appreciating assets), or if you expect a lower threshold, there are ways to utilize trusts to take advantage of today's exemption. Items contributed to the trust are valued at today's value and count against your lifetime exemption, and the future value is essentially ignored when you die. (Note that I'm heavily simplifying here.)

I remember a story from when I first got out of college and into public accounting. One of our clients was a food manufacturer who had a relatively high value. The old guy at the top owned almost all the stock, which meant if he died, his kids would have to pay substantial inheritance taxes.
The problem is, no one had that kind of money sitting around, most of the wealth was tied up in the business. This meant they would have had to sell the business to pay the tax on inheriting the business.

Some legal fees were paid, and some financial maneuvering was performed, and as long as they guy lived for a couple more years, the problem could be solved. But what an awful thing to realize you may have to sell the family business to pay for inheriting the family business!

Standard disclaimer: this is not legal or tax advice. Do not act on anything I've said without consulting a real-life professional.

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