Highlights of the article
Wealth Tax, Lifetime Exemption, Surviving Spouse, Election Considerations, Financial
Disadvantage, and Extension of Portability.
When a person passes away, the value of their estate is subject to estate taxes, which is
currently charged at 40% of the estate's taxable value. The lifetime exclusion (exemption) from the estate tax, which is $12.06 million for 2022, does exist. Gifts that exceed the yearly gift tax exclusion are taxable and can be reduced by the lifetime exclusion. This implies that the first $12.06 million of an individual's estate is excluded from estate tax and goes tax-free to the individual's beneficiaries if the individual dies in 2022 and hasn't already used part of their lifetime exclusion to offset gift tax. This lifetime exclusion amount is subject to Government preferences and is yearly modified for inflation.
For married taxpayers, there is a separate lifetime exclusion of $12.06 million available to each spouse (for 2022).
In a simplified example, suppose a married couple, John and Cheryl have a combined
inheritance valued at $15 million in 2020 when John passes away. During his lifetime, he had
made no taxable donations. John taxable estate was $7.5 million (half of the $15 million). The
estate and gift tax exemption level in 2020 is $11.58 million, thus John’s estate is tax-free ($7.5 million less $11.58 million)As Cheryl is John's only beneficiary, she receives his $7.5 million estate, which when coupled with her $7.5 million takes her estate total to $15 million (which does not rise or decrease in this scenario). John dies in 2022, at a time when the estate tax exemption is $12.06 million.Cheryl's taxable estate is $2.94 million ($15 million less $12.06 million), resulting in a $1,121,800 estate tax (based on the estate tax rate schedule, which is $345,800 on the first $1 million and 40% on the remainder). Married taxpayers, on the other hand, enjoy a particular advantage that permits a surviving
spouse to make a portability election. The portability choice simply permits the surviving spouse to add the unused estate tax exclusion of the deceased spouse to their own. The exclusion can be used to offset taxable gifts throughout the surviving spouse's remaining lifespan, and whatever isn't utilized that way can be used to lower the surviving spouse's estate tax at his or her death. Example - Assuming John died in 2020, the estate tax exclusion was $11.58 million, and his
estate was $7.5 million. As a result, his unused estate tax exclusion was $4.08 million ($11.58 million minus $7.5 million). Since John's death, Cheryl has made no taxable gifts. Cheryl's estate would have had to file an estate tax return if the portability choice had been made. In 2022, the tax exemption would have been $16.14 million ($4.08 million + $12.06 million). As a result, none of Cheryl’s $15 million estate would have been taxed because the exclusion of $16.14 million surpassed the estate's valuation. The net tax savings are $1,121,800. However, there is a major financial cost associated with choosing the portability choice. Even though filing an estate tax return for the first spouse to die is not necessary because the estate's worth is less than the exclusion threshold, submitting an estate tax return, IRS Form 706, is required to make the portability election. An estate tax return is time-consuming, difficult, and expensive to prepare. Because the great majority of surviving spouses estates will be smaller than the lifetime exclusion and they will likely receive no benefit from electing carryover of their deceased spouse's unused exclusion, most surviving spouses choose not to file Form 706.
However, there are some considerations to consider before making that selection.
1. As previously noted, the surviving spouse will have inherited the deceased spouse's estate assets, enhancing the surviving spouse's estate worth.
2. Depending on the number of years the surviving spouse lives after the death of the dead
spouse, the kind of assets inherited and how they are invested, the surviving spouse's costs,
and so on, inflation can cause the value of the surviving spouse's estate to significantly grow.
3. There is also the possibility that Government will reduce the lifetime exclusion. Previously,
legislation was proposed that would have decreased the exemption to as little as $3.5
4. The surviving spouse may be entitled to an inheritance from a family or acquaintance.
5. The prospect of winning a large sum of money in the lottery. The list continues on, and all alternatives must be weighed before deciding whether to pay
the expenditure of voting or not. If it is decided not to file the portability election, the estate executor of the deceased spouse
can anticipate the tax preparer to ask for a signed statement that the decision to prepare a
Form 706 for the estate of the deceased spouse and to elect to claim the deceased spouse's
Unused exclusion is declined, in case that choice is later contested by the surviving spouse's