If your family has significant assets, it is now easier to avoid federal estate taxes, thanks to recent changes to the IRS.
The IRS Reformed a Strategy Known as “portability,” it is used by high-net-worth married couples who expect to pay federal estate taxes when the other spouse dies.
Here’s how it works: While one spouse can take all of his or her partner’s assets tax-free, estate tax may be payable after the surviving spouse passes away, depending on the total value.
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In 2022, there is an exemption of $12.06 million per person for gift and estate taxes, which means the federal fee for giving $12.06 million or less to your children or other non-spouse beneficiaries during life or upon your death. will not give. Anything above that could cost you up to 40% property tax.
But the surviving spouse can elect portability, allowing them to keep their partner’s unused exemptions as well as their own, according to certified financial planner David Silversmith, a CPA and senior manager at PKF O’Connor Davis, in Hauppauge, New York. can be explained in This means the couple can make a gift of $24.12 million before estate taxes begin.
Previously, the surviving spouse had two years from the death of their partner to choose portability, but the latest IRS change has extended the deadline to five years, he said.
Choosing portability made easy: It’s ‘almost a no-brainer’
Another change: If you’re within the five-year window, you’ll no longer need to request guidance from the IRS, known as a private letter regime, said Michael Whitty, a CFP Freeborn & Peters. Practicing as an estate planning lawyer in in Chicago.
You can opt for portability within a period of five years by filing a wealth tax return. “It’s incredibly simple, so it makes it almost a no-brainer,” he said.
Whitty said a property tax return can cost anywhere from $5,000 to $20,000, or more, depending on the complexity and where you live. “But when you compare that to the 40% savings on every million dollars of portability discounts, that’s pretty tempting.”
What’s more, while the current $12.06 million exemption will adjust for inflation through 2025, the exemption is reduced to about one-half in 2026 when provisions from Republicans’ 2017 tax law sunset. Whitty estimates the exemption will fall to between $6.5 million and $7 million.
“This is potentially very, very important,” said Kevin Matz, partner at Arntfox Schiff’s Private Clients, Trusts and Estates group in New York, noting that many more estimates could be affected.
Omitting an asset return can have ‘very bad consequences’
When a loved one dies, heirs file Form 1040 for the final tax return, along with Form 1041 for any income earned by the estate in the year of death. Some families also file Form 706 for wealth tax.
However, if your estate and lifetime gifts are less than the $12.06 million exemption for 2022, you do not need to file a federal estate tax return. But experts say it can still be beneficial for some high-net-worth families.
Matz said it can be risky for wealthy families to skip property tax returns, especially with hard-to-value assets, such as certain types of businesses.
You can assume the first spouse’s assets are below the threshold, but if the IRS questions the valuation of the assets later, it could prevent the second spouse from taking full advantage of portability, he said.
“It would be a very bad outcome resulting from not getting professional advice,” he said.