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I recently read an article in the Wall Street Journal regarding a new tax break for married couples. The original article "A New Tax Break for Married Couples" by Laura Saunders can be viewed by clicking here.

A New Tax Break for Married Couples

By: Laura Saunders

The IRS issues final rules detailing generous estate-tax break for millions of couples

"You can’t take it with you, but it is getting easier to leave it to your heirs.

The Internal Revenue Service recently released final rules detailing a generous estate- and gift-tax break for married couples who don’t set up expensive trusts before death.

The break, known as “portability,” allows spouses to pass nearly $11 million of assets to heirs free of estate tax. Without it, many couples would qualify only for one estate-tax exemption instead of two.

This exemption, which is indexed for inflation, is $5.43 million per individual in 2015. This year, only a tiny fraction of estates—about 4,000—are expected to owe taxes, according the data from the Tax Policy Center, a nonpartisan group in Washington.

But the new rules come with crucial caveats, experts say. “Individuals and advisers need to be aware that they must act quickly after the first spouse dies,” says Laura Hirschfeld, an estate-tax lawyer at McDermott Will & Emery in New York.

That’s because estate-tax returns must be filed—usually within nine months of the death—to take advantage of portability.

Many experts worry that executors will overlook this deadline, especially if an estate is smaller than the exemption and there is no other reason to file a return.

“This is a very real problem,” says Don Williamson, executive director of the Kogod Small Business Tax Center at American University. Not opting for portability can “shortchange the survivor and can put the executor at risk of being sued,” he adds.

Congress first created portability in 2010 and made it permanent in 2013 to address a long-standing issue.

Since 1981, the law has allowed spouses to leave assets to each other free of estate tax. But in such cases, the assets are sheltered by the marital benefit—and the couple in effect forfeits one of their two estate-tax exemptions. At the second death, only one exemption is left.

Estate planners devised trusts to deal with this issue, but they could be costly and clumsy—and people had to be willing and able to plan ahead.

Portability allows the surviving spouse to pick up the unused portion of the partner’s gift- and estate-tax exemption if the executor makes an election on Form 706, the estate-tax return.

Here is how it could work: Say a couple has a total of $8 million in assets, with $7 million in a business and other assets owned by the husband, and $1 million owned by the wife. If the wife died earlier this year and left everything to her husband, he could have an estate of $8 million, or $2.57 million above the current exemption. The federal tax due would be about $1 million, says Ms. Hirschfeld.

If the executor files a return after the wife dies and elects portability, however, then the wife’s unused $5.43 million exemption carries over to the husband. That gives him a total of $10.86 million to shelter gifts made during his lifetime or assets left in his estate—so there is a good chance no tax would be due.

What if a couple’s combined assets are far less than in this example—say, well below $5 million? Experts still recommend taking advantage of portability because assets can rise in value, especially if the second death could be decades away.

“Who really knows what their estate’s going to be down the road?” says Scott Kaplowitch, an accountant at Edelstein & Co. in Boston. Besides asset growth, the survivor could get a windfall from elsewhere, such as an inheritance, or perhaps remarry someone with substantial assets, he adds.

The portability rules are generous in that they allow surviving spouses to carry the unused exemption amount into their next marriage. So if the widower in the example above lives longer and remarries, his first wife’s unused exemption (plus his own) remains available while his second wife is alive.

But there are limits: One taxpayer can’t pile up exemptions from several marriages. The taxpayer can only use his most recently deceased spouse’s exemption. This is a complex area with potential benefits and pitfalls, and affected taxpayers should seek expert help.

For most people who aren’t ultrawealthy, the chief downside of portability is the expense of estate-tax return preparation, which usually requires professional help. The good news is that if assets are below the $5.43 million limit, expensive appraisals often aren’t necessary. Instead, the executor can file a list with reasonable estimates.

The new portability rules are likely to spur a rise in estate-tax filings, which totaled only 34,000 in fiscal year 2014. It also may spur business for preparers of estate-tax returns such as accountants and enrolled agents, who often charge less than lawyers."

© 2014 James R. Modrall, III


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