The rich now have more time to avoid inheritance tax


If your family has significant wealth, it’s now easier to avoid federal estate taxes, thanks to recent IRS changes.

The IRS has enhanced a strategy known as “portability,” used by wealthy married couples who expect to owe federal estate taxes upon the death of the second spouse.

Here’s how it works: Although a spouse can inherit all of their partner’s assets tax-free, inheritance tax may be due after the death of the surviving spouse, depending on the total value.

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In 2022, there is a $12.06 million per person exemption for gifts and estate tax, which means you won’t owe federal levies for giving $12.06 million or less to your children or other non-spousal beneficiaries during your lifetime or upon your death. You may owe up to 40% property taxes on anything over this amount.

But the surviving spouse can choose portability, allowing them to benefit from their partner’s unused exemption along with their own, explained certified financial planner David Silversmith, CPA and principal of PKF O’Connor Davies in Hauppauge, New York. This means the couple could offer $24.12 million before inheritance tax kicks in.

Previously, surviving spouses had two years from the death of their partner to elect portability, but the IRS’ latest change extends the time limit to five years, he said.

Choosing portability has become easier: it’s “almost a no-brainer”

Another change: If you’re in the five-year window, you’ll no longer need to seek advice from the IRS, known as a private letter ruling, said Michael Whitty, a CFP practicing as an attorney. in estate planning at Freeborn and Peters. in Chicago.

You can elect portability within the five-year period by filing a tax return. “It’s incredibly simple, so it’s almost a no-brainer,” he said.

An estate tax return can cost between $5,000 and $20,000 or more, depending on the complexity and where you live, Whitty said. “But when you compare that to saving 40% on every million dollars of the portability exemption, it’s pretty compelling.”

Additionally, while the current exemption of $12.06 million will adjust for inflation through 2025, the exemption decreases by approximately half in 2026 when the provisions of the 2017 Republican tax legislation expire. Whitty estimates the exemption will drop between $6.5 million and $7 million.

“It’s potentially very, very significant,” said Kevin Matz, a partner in ArentFox Schiff’s private client, trusts and estates group in New York, noting that many other estimates could be affected.

Skipping an estate declaration could give ‘a very bad result’

When a loved one dies, heirs file Form 1040 for a final tax return, as well as Form 1041 for any income earned by the estate in the year of death. Some families also file Form 706 for property taxes.

However, if your estate and lifetime gifts are less than the $12.06 million exemption for 2022, you are not required to file a federal tax return. But experts say it can still be beneficial for some wealthy families.

Matz said it can be risky for wealthy families to skip a tax return, especially with harder-to-value assets, such as certain types of businesses.

You may believe the first spouse’s wealth is below the threshold, but if the IRS questions the valuation of the estate later, it may prevent the second spouse from taking full advantage of portability, he said. .

β€œIt would be a very poor result produced by not seeking professional advice,” he said.


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