Estate Tax Complexities

rev mortgageYears ago, the way to most efficiently save on estate taxes was to set up credit shelter trusts that would pour assets from one spouse to another when death occurred, so that both spouses would get the maximum estate tax exemption. In those simpler days, people who didn’t have to pay estate taxes didn’t have to file an estate tax return.

Today, we live in a very different world. No longer is a credit shelter trust necessary; the surviving spouse gets to keep the unused portion of the deceased spouse’s estate tax exemption regardless of who owns which assets at the time of death. And with the exemption up to $5.43 million per spouse, you would think that fewer people would have to file estate tax returns.

This last assumption would be wrong. In order to claim the portable exemption of the deceased spouse, the estate has to file Estate Tax Form 706 on behalf of the survivor. This form can be complicated; it requires the executor to report the value of the assets that don’t need to be reported for tax purposes, and to subtract that amount from the exemption—in order to calculate the exemption amount that the survivor can keep and use when he or she dies and passes on assets to heirs. So you still have to do an estate valuation.

If you know for sure that your future estate won’t exceed $5.43 million indexed for inflation, then there is no need to file an estate tax return. But when people factor in the (hopefully) appreciating value of their house, in addition to their retirement assets over the years they expect to live, a surprising number of people should opt to file the tax form.

There’s one other complication: although the surviving spouse’s exemption will keep rising with inflation, the portable amount stays fixed until it’s eventually used.

And one more: people who die with assets in their name get a step-up in cost basis on their investments—which basically means that the capital gains taxes that would otherwise be owed when those investments are sold will go away. So although it no longer matters, from an estate tax perspective, who owns which assets, it is beneficial for the deceased spouse to own assets that have a low cost basis—things like a home purchased many years ago, or stocks acquired before a large runup in value, or shares of a small business that started with zero value. But beware transfers on a spouse’s deathbed; if the deceased dies less than a year after the transfer, the tax code treats it as if the transfer were never made.

What? You expected the government to simplify your estate taxes?


About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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