Flood: Planning ahead can help avoid unnecessary estate tax burden

While most people believe they do not have enough wealth for estate taxes to apply to them, the new concept of portability has the potential to affect taxpayers of all financial classes.

Estate taxes are imposed by the federal government on the transfer of property from one person to another at death. The Estate Tax return consists of an accounting of everything owned or invested in at the date of death. The fair market value of these items is used. This is not necessarily what was paid for them or what their values were when acquired. The total of all of these items is called the “gross estate.” The gross estate is made up of all property including cash, securities, real estate, insurance, trusts, annuities, business interests and other assets (real or personal, tangible or intangible) wherever situated in which the decedent had an interest. 

Normally, the value of the gross estate is determined as of the date of the decedent’s death. However, the executor may elect to value assets as of the alternate valuation date, which is six months after the date of death. The primary benefit of this election is the estate tax savings that result when the alternate valuation date reduces the value of the property in the gross estate.

Once the gross estate is determined, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at what is called the “taxable estate.” These deductions may include mortgages and other debts, estate administration expenses and property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.

After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit, so named because federal gift and estate taxes are integrated into one unified tax system. 

A filing is required for estates with combined gross assets (probate and nonprobate) and prior taxable gifts exceeding the unified credit of $5,250,000 in 2013. This is done on Form 706, the U.S. Estate Tax Return. It is the executor’s responsibility to file this form within nine months after the date of the decedent’s death. If unable to file Form 706 by the due date, an automatic six-month extension is available. 

For married couples who die after 2010, even if a decedent’s gross estate plus prior taxable gifts does not exceed the filing threshold (up to $5.25 million for 2013), filing is required to elect portability. Portability is the ability to transfer the amount of the deceased spousal unused exclusion (DSUE) to the surviving spouse. If the first spouse dies and does not have a gross estate of the unified credit ($5,250,000 in 2013) the unused portion is passed along to the spouse by filing the Form 706.

While at the time it may seem their net worth will never reach that level – one can never predict the future, including the real estate market, value of securities, value of business, lottery winnings and inheritances on the impact on one’s estate value. With the estate tax rate at 40 percent, it is important to take the precaution of electing this portability now.  

Example: Assume H and W are married. H has $1 million and W has $2 million. H dies when the exemption is $5 million and leaves the estate to W. W lives another 20 years and in that time the value of her home, investments, business and inheritances increases her estate to $6 million. If portability is not elected when H dies then $5 million of H’s unused exemption is not allowed to transfer to W. If W dies and exemption is $3 million then taxable estate is $3 million, assuming the estate tax rate is 40 percent, the estate tax is $1.2 million. If portability had been elected when H died, no estate tax would be owed.  

Many states have estate or death tax filing requirements separate from the federal requirements. A tax or filing may be required in both resident and non-resident states depending on the property owned or physically present in the states. In Illinois, if the estate has an estimated gross value of more than $4 million, a return must be filed, even if a federal return was not required.

As with all tax matters, you may wish to consult a CPA or competent tax preparer to ensure you are compliant with the law.

• Michael J. Flood, CPA, MST, is a partner with Caufield & Flood Certified Public Accountants in Crystal Lake. Reach him at 815-455-9538,, or 

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