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Think You Won’t Owe Estate Tax?

The current estate tax exemption amount is $11.7 million per spouse before a 40% estate tax kicks in. How many of us even have that many millions to worry about this topic? Stay with me and I’ll show you how estate taxes just might reach out and grab you. Changes are on the horizon.

Congress tinkers with the estate tax exemption more often than you think. As recently as 2008, the exemption was only $2 million. It’s already legislated to be reduced to $5.5 million per spouse in 2026. The new administration’s tax plan reduces it further to $3.5 million while increasing the rate to 45%.

Here’s how that could play out: Let’s suppose the exemption is $3.5 million. A married couple has a combined estate of $3 million when the wife passes away. There’s no estate tax on marital asset transfers…so far so good. The husband lives another 15 years, and the estate grows to $5 million before passing to their daughter. Since he can only pass $3.5 million tax-exempt, the daughter pays estate tax on the excess $1.5 million. At 45%, the cost is $675,000. Whew, that’s a chunk of change.

What could the husband have done differently to save his daughter from losing $675,000 to taxes? He could have paid about $250 to have a timely Form 706 estate tax return prepared, where he would have elected the “portability provision” which allows the surviving spouse to claim their deceased spouse’s unused exemption. Simply by filing that return, he could have claimed his wife’s $3.5 million exemption as his own, raising his total exemption to $7 million. His daughter would have paid $0 estate tax on his $5 million estate. Since he didn’t, the portability was lost.

How would he have known about this obscure rule? He didn’t owe any estate taxes when his wife died, so why would he have filed an estate tax return? Truthfully, he couldn’t have known, but his financial advisors should have. It was a $675,000 mistake.

As part of our integrated wealth management services, we make it our business to understand these intricate tax rules and advocate for our clients. If your investment professional isn’t talking to you about taxes (or can’t do so without the proper licensing), then you should be talking to us. There’s too much at stake to get investment advice without tax advice. The two are intertwined.

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