Dear Mr. Premack: My father’s estate value is approximately $350,000,
and my mother’s is approximately $650,000. Father passed away in April
2012 and mother inherits his property, so she will have estate of
approximately $1,000,000. She is healthy and we hope to have many more
years with her. We believe her estate value will increase over time
because it is mostly valuable real estate. Although my father's estate has
no taxes due, should we file in order for my mother to make the election
to use any unused exemption of her husband's estate tax? We are not sure
if there is any downside or reason not to file for the deceased spousal
unused exclusion amount. – R.S.
The answer to your question
depends on accurately predicting what Congress will decide about future
federal estate tax exemption rates. You may know the history: Before year
2000, the federal estate tax was imposed on all estates larger than
$675,000. The tax rate was 50%, so many people went through complex tax
planning to reduce or eliminate the estate tax. The Bush law increased the
exemption to $3.5 million by 2009 and set it to expire at the end of 2010.
In late 2010 Congress and Obama authorized a new, two year $5 million
exemption. Now, Congress will either pass new exemption rates for 2013 or
will refuse to do so. Inaction will drop the exemption to about $1
million, which is the risk your mother seeks to avoid by claiming your
father’s unused $5 million exemption.
Allowing the surviving
spouse to accumulate the deceased spouse’s unused exemption (called
portability of the exemption) was new with Obama exemption law. Prior to
portability, this same concept could be achieved with proper tax planning
(often called bypass planning) which utilized a trust to avoid wasting the
deceased spouse’s exemption. No trust is needed to use portability.
Instead, the IRS requires the surviving spouse to file an estate tax
return for the decedent, and in that return to elect portability.
Here’s an example: Greg and Lori were married for many years and saved $6
million, all community property. Greg died in 2012 and his Will left his
half to Lori. The devise to her is tax-free under the “unlimited marital
deduction” so his $5 million exemption is never used. Lori now has $6
million with her exemption of $5 million. When she dies, the extra $1
million will be subject to federal estate tax.
portability, Lori can file an estate tax return on Greg’s estate (an
otherwise unnecessary action because he owed no tax and was not required
to file a return). She elects to have his $5 million exemption accumulated
with her $5 million exemption. When Lori makes Greg’s exemption portable,
she has a $10 million exemption if she dies in 2012. If she dies in 2013
(so her personal exemption is just $1 million) she still gets to use
Greg’s $5 million exemption. When she dies, her $6 million estate is
totally tax free because the dual exemptions eliminate the tax.
Now to your parents. Since your father left everything to your mother,
there is no estate tax due upon his death. No return is required. But your
mother will have an estate of $1 million which should grow larger over
time. She is not expected to die in 2012. Accurately predicting the future
is beyond our powers; we do not know what exemption she will have when she
dies. The worst case scenario is that she will have a $1 million exemption
(if Congress fails to pass a new exemption rate before 2013).
can control whether to file or not file the return. She cannot control
what action Congress will take. Those factors lead to four possible
outcomes. Her choice of actions will dictate the outcome, and her choice
will depend on her risk tolerance:
1) She files, then Congress
later passes a new exemption rate. She did not gamble, but filing the
return was a waste of time and money. The new exemption eliminates the
2) She files, then Congress later fails to pass a new
exemption. She did not gamble. The return was needed so that she had
portability. Portability eliminates the tax.
3) She does not file,
then Congress later passes a new exemption rate. Her gamble wins. She
spent no money on filing the return and the new exemption eliminates the
4) She does not file, then Congress later fails to pass a new
exemption. Her gamble loses. The money she saved by not filing is tiny
compared to the estate tax that will be due when she dies.
addition to working with her CPA on the tax issue, she should see a
certified Elder Law attorney to probate your father’s Will and to review
her own estate plan now that she is widowed.