Husband's Small Estate Can Do A Huge Favor to Wife's Family - the Estate Tax Portability Election

Blended families are common these days primarily because the divorce rate is high, and since people are living longer, it's common for someone to lose their spouse and then remarry in their 60's, 70's or 80's.

Many blended family situations are such that each spouse has their own children. It's common for the couple to establish a Marriage Contract (also referred to as pre-nup, pre-nuptial agreement, or separate property contract.

I've been working with a blended family in recent months that has strong ties to the Baton Rouge, New Orleans, and Lafayette communities. The wife has a very large estate (let's say, $10 million) and the husband has a much smaller estate (let's say $1 million). Each of them has their estate legal program set up so that when each spouse dies, their respective estates will go to their respective children. The problem is that the wife's estate, at $10 million, faces perhaps a couple of million dollars or more in estate tax when she dies (depending on value and tax law at time of death).

The couple is predicting that the husband will die first - he is older and is not in as good health as the wife. He'll be leaving everything to his four adult children. His wife will not be involved in his estate settlement. There will no federal estate tax return due after the husband dies because his estate - at $1 million - will be less than the applicable exemption ($5.45 million for deaths in 2016).

Here's the kicker: when the husband dies, there will obviously be no estate tax because his estate is relatively small compared to the estate tax exemption. But if the husband's estate, after he dies, files an estate tax return and makes the portability election, then the wife's estate, when she dies, will not only have her $5.45 million estate tax exemption, but she will also get to use the husband's unused exemption. So, let's say the husband does not use $4.45 million of his exemption and his estate makes the portability election on his estate tax return (IRS Form 706), then the wife, at her subsequent death, could exclude $9.9 million of her estate from the 40% tax.

Bottom line - when the husband dies, the wife and her children should be REALLY nice to the husband's family (particularly his executor) in order to sweet talk him into filing an estate tax return and making the portability election. In fact, the wife should offer to pay for the accounting and legal work necessary to get that done. It will be a small price to pay to recognize as much as $2 million of tax savings at the subsequent wife's death.

If you are in a marital situation and one spouse has an estate that is much larger than the other spouse, you may want to have a discussion with someone like myself who can help you set up a Louisiana estate legal program to minimize or avoid the tax that both families may have to incur later.