Lawyers and wealth managers who specialize in passing assets to the next generation love to brag about their ultra high net worth clients. But privately they admit that many (or most) of those who seek their help with wills and trusts don’t fall in this category. And lately they would have us believe that tax planning for these folks, most notably those with assets in the $5 million to $10 million range, is very, very, challenging.
That was one of the continuing themes last week at the Heckerling Institute on Estate Planning in Orlando, the annual Super Bowl on the subject. The catalyst for the discussion among the 2,900 lawyers, accountants and insurance pros gathered there, was a planning device that Congress introduced on an interim basis starting in 2011 and made permanent with the American Taxpayer Relief Tax Act of 2012. Tax geeks dubbed it “portability.”
Despite its wonky name (which mind you does not actually appear in the tax code so don’t blame Congress for this particular jargon), portability solved a pressing problem and had all the hallmarks of a consumer-friendly new rule for the 99%. In a nutshell, the law made it possible for widows and widowers to carry over the estate tax exemption of the spouse who died most recently and add it to their own. The tax law refers to the sum carried over as the “deceased spousal unused exclusion amount.” In common parlance it has become known by the short-hand, “the DSUE amount.”
At current rates this enables married couples to transfer $5.34 million apiece ($10.68 million together) tax-free. This tax-free amount (also called the “exclusion” or “exemption”), which is adjusted for inflation, will reach $6.58 million 10 years from now, and $8.95 million in 20 years, according to projections by Bernstein Global Wealth Management.
Public service announcement: To take advantage of this option or “elect portability” (in legal lingo), the executor handling the estate of the spouse who died must file an estate tax return (Internal Revenue Service Form 706), even if no tax is due. This return is due nine months after death with a six-month extension allowed. (For questions and answers about other aspects of portability, see “A Married Couple’s Guide To Estate Planning.”)
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