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Portability could save your estate thousands

While the attention of the nation was focused on the battle over the American Taxpayer Relief Act of 2012 because of the impact on personal income tax, the law also made significant changes to estate tax law.  People spend a lifetime building financial security and working diligently to build an estate to pass to their children.

An important component of estate planning is preserving as much of your acquired net worth as possible for your comfort in your retirement years and to pass on to provide a financial foundation for your children and other beneficiaries.  Tax obligations can take a huge chunk out of your assets.  It is an extremely complicated Tax Code. But, below I have tried to provide an extremely general discussion on a key federal estate tax law change that could result in significant savings.

One of the most significant changes in the new tax law adopted at the end of 2012 involves the decision to make estate tax portability permanent.  For those unfamiliar with this concept, estate tax portability permits a surviving spouse to use any unused portion of their deceased spouse’s estate tax exemption.  The current exemption in 2013 for estate taxes is $5.25 per person.  This means that a married couple has a total available exemption of $10.5 million from the requirement that their estate pay federal estate taxes. This means that if your spouse dies first but only has $3.5 million in separate assets, the surviving spouse can exempt $7 million in assets from estate taxes rather than just $3.5 million.  There are other potential deductions that could apply, but I am keeping this very simple.

If the estate tax portability law had not been made permanent, the unused portion of the first-to-die spouse’s estate tax exemption would have been wasted unless your Estate Planning Attorney used careful estate planning tools, such as a “bypass trust,” to avoid these tax consequences.  This strategy may still be an option worth exploring because it can avoid loss of individual exemptions, but the trust must be created before either spouse passes away.

While this is a valuable exemption for married couples and families with a high net worth, the exemption is not automatic.  To claim the estate tax portability exemption, the surviving spouse or representative of the estate of the deceased spouse must file an estate tax return within a relatively short period of time after the death of the first-to-die spouse.  The estate tax return must be filed within nine months of the passing of one’s spouse.   If this required tax return is not filed, the portability exemption will be waived, which could result in estate tax liability that can amount to hundreds of thousands of dollars or more.

This type of deadline is one reason it is important to work with a North Carolina Estate Planning Lawyer because this type of technical requirement may easily be overlooked.  If the first spouse passes away with nominal separate assets, the small size of the estate may create a false sense of security that there is no need to file an estate tax return.  However, this decision can hurt the surviving spouse if his or her estate is larger than $5.25 million when he or she passes away.

Here is an Example:

A married couple has a total of $9 million in assets.  The wife owns $1 million in assets whereas the remaining $8 million belongs to a business owned by the husband.  When the wife predeceases her husband, the executor of her estate files an estate tax return so the remaining $4.25 million of her exemption is available to her husband.  When the husband subsequently passes away, the entire $8 million in business assets will pass to his heirs.  If the wife had failed to file the estate tax return, the husband would have been limited to his own $5.25 million exemption which would have left $2.75 million in assets subject to estate tax.  Because the husband’s estate would have fallen into the forty percent bracket, this would have amounted to an estate tax bill of $1.1 million (i.e. 40% of $2.75 million).

At our North Carolina Estate Planning Law Firm, we recognize the importance of avoiding tax obligations, probate costs and other expenses that can compromise the value of your estate.

If you have estate planning questions in Charlotte North Carolina we invite you to call us at (704) 843-1446 or email Sabrina Winters at swinters@sabrinawinterslaw.com to learn how we can help your family.

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