I've been working with a Baton Rouge family that had an estate plan set up. The wife died. Her separate property and her one-half of the community property totaled about $2 million. She owned property in Baton Rouge, Lafayette, and Gonzales.
After the wife died, I was working with the surviving husband and the children. They assumed, rightly so, that the wife's estate was not required to file a federal estate tax return because the gross value of her estate was less than $5.45 million.
While they were technically correct, they did not realize that the failure to file a federal estate tax return on behalf of the wife's estate could cost them millions in the long run. You see, the husband had a large estate of his own. He owned property in New Orleans, Shreveport, Alexandria, and near Monroe. He also owned a significant IRA. His total estate was about $7 million and likely to grow.
I explained to the family that while the wife's estate was not required to file a federal estate tax return with the IRS, they should do so and make the "portability election." Filing a U.S. Form 706 on behalf of the wife's estate, and making the appropriate portability election would allow the surviving husband's estate to use $3 million unused estate tax exemption that they wife's estate failed to use.
Had the wife's estate not filed an estate tax return, then the husband's estate would only be able to shield $5.45 million from the 40% estate tax. But since we are filing the return and electing portability (even though it is not required to file a return since her estate was less than the $5.45 million exemption), the husband will be able to shield at least $8.45 million from estate tax when he dies. The portability election allows his estate to use his full exemption plus use the amount of her exemption that her estate did not use.
Future appreciation of an estate after the first spouse dies, or a future change in the law which reduces the estate tax exemption, could cause families to incur estate tax when they did not think they would. Careful consideration should go into whether an estate tax return should be filed with the IRS after the first spouse dies, even if it is not required.
If you are concerned about the possibility of your survivors incurring a 40% federal estate tax when you pass, shoot me an email at firstname.lastname@example.org, and perhaps we can discuss the simplest ways to preserve your estate from the government and for your family.