By Chuck Des Roches, Attorney
Noland, Hamerly, Etienne & Hoss
One of the most common questions clients ask their estate planning attorneys is whether they need to be concerned about inheritance tax – either as beneficiaries of family members' estates, or as the people who will be leaving their property to their loved ones.
While there is no longer an "inheritance tax" in California, there is a federal estate and gift tax that could take a large (40%) bite out of what the intended beneficiaries of an estate or trust might otherwise receive.
Under the current tax law, most of us will not need to worry about the federal estate tax issue, because each of us has an exclusion from estate tax (called the "Applicable Exemption Amount" or "AEA") that allows us to leave up to $11.2 million in wealth to whomever we please without incurring the tax.
In addition, since January 1, 2013, under something in the tax law called "portability", the AEA of a married person who dies may be transported his/her surviving spouse, effectively doubling the surviving spouse's AEA and allowing him/her to leave $22.4 million to whomever the surviving spouse chooses.
HOWEVER, the current AEA is set to expire in 2025, reverting to the pre-2018 law that allows each of us to leave $5 million, adjusted annually for inflation ($5,490,000 in 2017). The good news is that portability will survive, and a married couple could still leave $10 million + to their intended beneficiaries.
In order to take advantage of the portability option, the executor or personal representative of the deceased spouse must file an IRS Form 706 Federal Estate & Gift Tax Return within nine months of the date of the deceased spouse's death (15 months if an application for the automatic six-month extension is filed prior to the expiration of the nine month deadline).
Having an IRS Form 706 prepared is not cheap – I've had clients who paid their accountants anywhere from $9,000 to $15,000 to get the return completed. Most people have estates that are valued well below $5 million, let alone $11.2 million, and aren't really keen on spending that kind of money just to elect portability to get their deceased spouse's AEA transferred to them when they almost certainly will never need it to completely avoid dreaded federal estate tax.
Generally, I advise my clients that it is their decision to make. There are many factors (including, but not limited to, the client's age, health, and prospects of inheriting or receiving large amounts of wealth), that impact whether it makes sense to spend the money to file or not to file. My suggestion is that you periodically check in with your estate planning attorney and/or tax professional to make sure you are informed about the current state of the tax law concerning federal estate tax and that you seek advice on whether you need to do tax planning, including filing an IRS Form 706.
This article is intended to address topics of general interest and should not be construed as legal advice.
© 2019 Noland, Hamerly, Etienne & Hoss