There are several newly minted millionaires as a result of Wednesday’s Powerball drawing who now have a number of new estate planning considerations on their plate that may not have been relevant before, including estate tax. For married individuals with high net worths, the A-B trust has long been a staple of their overall estate plan. Effectively, the A-B trust allows the surviving spouse to insulate the deceased spouse’s share of assets up to the estate tax exclusion amount (currently $5.25 million) by placing it in a “B” trust. When the surviving spouse dies, the trust allows $10.5 million in assets to pass to beneficiaries estate tax free!
However, in 2010, Congress introduced a new concept to the estate tax regime: portability. This concept allows a surviving spouse to exclude $10.5 million in assets (the deceased spouse’s unused exclusion plus the surviving spouse’s exclusion amount) without the need for an A-B trust. However, the surviving spouse must file a timely estate tax return. This means that within 9 months of death, an estate tax return complete with appraisals and a complete list of the decedent’s assets must be filed.
Even though your chances of winning the lottery are lower than your chances of most things (see, becoming President, picking a perfect NCAA bracket, or dating a supermodel for example), it still may be wise to file an estate tax return if you believe you might have a change in fortune in the future. For example, if you start a business or have wealthy family members from whom you might inherit, an estate tax return may help you preserve your higher exclusion amount. Also, if you have certain types of assets, such as collectibles, it may be useful to get the appraisals that would be required for an estate tax return, even if you don’t file one in order to establish the value for capital gains purposes in case you later sell the item. It is important to speak to your tax advisor soon after a spouse’s death to get advice about your particular situation. In fact, we typically tell people who call to report a death of a loved one not to do anything other than the funeral until they sit down with us.
As with any tax return, there is a statute of limitations against assessment and collection that typically begins once the return is filed. If you are serving as an executor or trustee, you may be liable for failing to file a return and, possibly, for the tax due. For that reason, it is important to carefully investigate whether a return is necessary and whether it is advisable to request prompt assessment. If you know an estate tax return was due and you received an inheritance of any kind, including life insurance or 401k benefits, it is important to proactively verify that the tax was paid. Otherwise, you could be left holding the bag for up to the entire amount of the inheritance you received as much as a decade after the fact!
Receiving competent advice about whether you should file an estate tax return, just get appraisals, or neither is an important part of the process when administering an estate or trust. If you ignore the potential for estate tax, it could be very costly!
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