Tax Strategies & Credits

What you need to know about the surviving spouse estate tax exclusion

What you need to know about the surviving spouse estate tax exclusion

When an American taxpayer dies, an account is taken of all of the assets they owned at the time of their death. The purpose is to determine the fair market value of their estate, including bank accounts, stock and investments, insurance, annuities, trusts, real estate, business interests and the like in order to determine the amount of tax it is subject to upon transfer to survivors or beneficiaries of the estate.

Not everybody is subject to estate tax.

Those who die with smaller estates are entitled to a specific lifetime exclusion that is inflation-adjusted each year. In 2016 this exclusion – which is reduced by the value of any untaxed gifts that the decedent distributed beyond the annual gift exemption over his or her lifetime -  is $5,450,000.  In situations where the person who died has an estate that falls under this calculation, it is not necessary to file an estate tax return because the assets do not qualify for a tax.

Even though there is no need to do anything further when this is the situation, there are certain circumstances where it is advisable to take action. This is particularly true if the person who died was married and has a surviving spouse. In this case, it is advisable to determine whether there is any chance that the surviving spouse’s estate will exceed the lifetime exclusion. If it will, then by filing what is referred to as a portability election and filing an estate tax return, then the lifetime exclusion that the deceased spouse didn’t use will pass to them, enlarging the exclusion of estate taxes that they can take advantage of. 

How this works

Envision a gentleman who died in 2014, leaving an estate of $2 million. The lifetime exclusion for 2014 was $5.34 million, and that amount would be reduced by the $1 million worth of taxable gifts that he made during his lifetime. That leaves an exclusion amount of $4.34 million which would then be reduced by the $2 million in assets, leaving an unused exclusion of $2.34 million that could be passed to his spouse by filing the estate tax return in a timely manner and choosing the portability election. That $2.34 million would then be added to her $5.45 million exclusion amount to provide a $7.79 million exclusion for her estate. 

Though calculating whether the surviving spouse will benefit from filing the estate tax return and portability election represents more work for whoever is administering the estate, and the preparation of the return can be costly, there are many situations where doing so saves a significant amount of money in the long run.  The exemption is a contentious issue in the U.S. Congress, and there are no guarantees that it will stay in place or remain at the same level. Another issue to keep in mind is that because the executor of an estate is not always the surviving spouse, and the executor and widow(er) may not get along, it is recommended that specific language be included in the will or trust requiring that the portability election be taken.

The question of whether to incur the costs and complications of filing an estate tax return can be confusing. For assistance in understanding all of the ramifications of taking (or not taking) advantage of the transfer of an unused lifetime exclusion, you can contact Spencer Wilson at 562-445-3888.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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