Submitted by Joel Shabsin, CPA

So far about 150,000 people in the U.S. have died from the Corona-19 virus. Some of them may be our clients and as accountants, tax preparers and trusted advisers we have an obligation to talk to any surviving spouses about the estate tax and portability of the unused exemption. This may be an important discussion in light of the upcoming election in November and the different ideas each political party has regarding death taxes and how to generate additional revenues for the federal government.

As you know the 2020 estate and gift tax exemption amount is $11,580,000 per person and as a result of this extremely high level, very few people are subject to estate and gift taxes. The Illinois exemption is only $4,000,000 per person so some clients may have Illinois estate taxes even though they are not required to file a Federal estate tax return.

Regardless of the value of the deceased client’s estate, it’s advisable to at least discuss portability of his/her unused estate and gift tax exemption. What if you have a married client who passes away with a $2,000,000 estate and their spouse also has a $2,000,000 estate. It could consist of a home, an IRA, a business or farm, investments, real estate rental property, etc. One spouse dies and because their estate is $2,000,000, well below the exemption amount, there is no requirement to file a 706 estate tax return. Now, assume the spouse lives another 25 years and the estate value from the date of death of the first spouse increases to $13,000,000. Also assume the exemption doesn’t change so at the death of the 2nd spouse, the
estate value is greater than the exemption amount by $1,420,000. The tax for the estate would be $568,000 at a 40% tax rate.

However, by applying for portability of the first to die’s unused exemption when he/she passes away, the surviving spouse can use the $9,580,000 unused exemption amount plus their $11,580,000 exemption amount to make the $568,000 tax go away. In effect, portability increases the 2nd to die’s exemption by the unused exemption from the first to die.

For another example assume the deceased spouse has a $6,280,000 estate and the surviving spouse has a $5,800,000 estate at the date of the first spouse’s death. Neither has an estate that exceeds the Federal exemption of $11,580,000 so no 706 is required. However by filing a 706 for portability, the $5,300,000 unused exemption amount becomes available to the
surviving spouse’s estate at his/her death. Again, assuming no tax law changes, the surviving spouse has a $16,880,000 for Federal estate taxes and because Illinois does not have portability, only a $4,000,000 Illinois exemption. When the first spouse dies, the surviving spouse inherits their estate with a step up in basis so the survivor’s estate is $12,080,000. Without the portability election, the surviving spouse would have an estate valued above the exemption and if they were to pass away shortly thereafter, they would have estate taxes to pay. But with portability, their exemption increases to $16,880,000 and there would be no Federal tax to pay at their death.

However, Illinois will want their cut of any amount over $4,000,000. The Illinois estate tax on an estate of $16,880,000 would be $1,524,400. Therefore, the objective should be to get the survivor’s estate at or below the $4,000,000 threshold for Illinois.

Portability also applies to gift tax and therefore the gift tax exemption is also $16,880,000 for the survivor. If during his/her lifetime, the survivor gifts estate assets to the beneficiaries of the estate rather than wait for them to inherit the assets, the survivor can gift $12,880,000 to the beneficiaries to get their estate to the $4,000,000 level to avoid the Illinois gift tax. However, depending on what is gifted and where it comes from, the beneficiaries may have taxes to pay when they liquidate the gifts. The survivor would get a step up in basis for the assets they inherit from the first to die. The basis to the beneficiaries of the gifts would be based on the survivor’s basis at the time of the gift. There would be no step up in basis for the survivor’s estate assets at the time of the first death, so care must be taken in determining which assets to give and when to gift them to minimize taxes to the beneficiaries or to the survivor if they liquidate assets to gift cash. Gift tax returns will have to be filed if gifts exceed the current $15,000 level but no taxes would have to be paid.