Someone has won $590.5 million in a record Powerball drawing. So far, there are only two certainties about the winner: the person bought the ticket in Florida and the person has a lot of brand new tax issues to consider. In addition to the large chunk of money seized from the winnings for income tax, the estate tax, and planning around it, is certainly necessary for the lucky 1 in 175.2 million. Indeed, a lottery spokesman stated: “If they know they won, they’re going to contact their attorney or an accountant first so they can get their affairs in order.”
Among the issues for individuals who have won (and those planning on winning) is the “use it or lose it” benefit of portability. As part of the new estate tax law, which became permanent this year, surviving spouses may file an estate tax return after the death of their spouse. The estate tax is due on estates over $5.25 million, which is now adjusted for inflation annually. For married couples with large estates, it is common to create an A-B trust in order to preserve the deceased spouse’s exemption and effectively double the amount that may be passed to heirs free of estate tax to $10.5 million. For those who don’t, using portability is another option.
The vast majority of individuals do not need an A-B trust for estate tax purposes anymore, although there are still other reasons it may be worth having. Additionally, in these cases the estate tax return is not required and, if filed, will report an estate tax amount due of $0. However, filing a timely estate tax return can preserve the deceased spouse’s exemption amount to cover a sudden, dramatic increase in the surviving spouse’s wealth, such as the case with lottery winnings. The portability feature of the new estate tax law “ports” the deceased spouse’s exemption amount to the surviving spouse, giving the surviving spouse the ability to exclude $10.5 million from estate tax in his or her own estate.
Additionally, for married couples who do not have a large enough estate to require an A-B trust to plan for estate tax but may experience an increase in wealth due to receiving an inheritance, an extremely profitable investment, or even winning the lottery, portability may actually be better. Filing an estate tax return does not require funding a second trust on the first spouse’s death and segregating those assets or respecting the terms of that trust in order to preserve the tax benefit. A second trust is also not subject to ongoing administration and annual tax returns. On the second spouse’s death, all assets will receive a “step up” in basis. For these reasons, portability offers more flexibility and less ongoing expense than an A-B trust.
Unfortunately, in order to take advantage of the portability exclusion, the estate tax return must be filed on time. For that reason, you cannot wait to see what happens in the future before deciding to make the election. There are a number of other fact-specific considerations to discuss with your attorney as well.
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