What if one spouse dies today, when the exemption is $11.58 million, but the surviving spouse lives until 2026, when it has shrunk to $6 million? If the surviving spouse’s net worth grows before then, each excess dollar of growth over the $6 million federal estate tax exemption could be taxed at 40% or more. These numbers don’t even factor in the possibility of the surviving spouse dying in a state that imposes its own estate or inheritance tax, at potentially lower exemption amounts.
Others may argue that the so-called “portability election” available under federal law solves all of these problems, because the surviving spouse can add the predeceased spouse’s “unused” federal estate tax exemption onto his or her own $6 million federal estate tax exemption, thereby eliminating the concerns of tax law changes. But even if we ignore the fact that the federal portability election is unlikely to be available for estate and inheritance taxes at the state level, and is definitely not available for federal generation-skipping transfer taxes (a topic beyond the scope of this article), is this generalization about the federal portability election true?
In fact, the portability amount will not be available to the surviving spouse if he or she remarries and the new spouse dies first. Although the surviving spouse may be entitled to a portability election applicable to the new spouse, there is no guarantee a portability amount will even be available at the new spouse’s death. The new spouse’s estate may be large, or the federal estate tax exemption at the time of his or her death may be smaller. And we’re still putting aside estate and inheritance taxes at the state level as well as federal generation-skipping transfer tax issues. These might have been blunted or eliminated if a “two-trust” or “two-share” estate plan had been used at the time the first spouse died.
What this means is that, after the 60% run-up in the Dow, some married couples might need to rethink their estate plans if they switched to joint wills or trusts in the last 10 years. This is especially true if one spouse is likely to remarry upon the death of the other. Otherwise, these couples risk surprising federal or state estate taxes, inheritance taxes or generation-skipping transfer taxes when the surviving spouse passes away.
James G. Blase, CPA, JD, LLM, is founder of Blase & Associates LLC, a St. Louis-area law firm practicing primarily in estate planning, tax, elder care, asset protection, and probate and trust administration. Mr. Blase is also an adjunct professor at the St. Louis University School of Law and in the Villanova University Charles Widger School of Law Graduate Tax Program.