In this episode, attorneys Christina Knopke and Annie Rogers focus on a spouse’s ability to file an estate tax return when the first spouse passes away in order to elect portability with Matt Mentzer, a fellow attorney at Creative Planning. This is one way for a couple to make sure they are using both of their estate tax exemptions, which will become increasingly important if the estate tax exemption amount is reduced in the future.
A Matter of Trust, hosted by Creative Planning attorneys Annie Rogers and Christina Knopke, is a thoughtful, informed discussion about ideas, trends and developments in estate planning. Our mission is to educate and inspire people to make better financial choices through knowledge, tools and strategies that ensure a more prosperous future.
Annie: This is Creative Planning, A Matter of Trust. I am Annie Rogers, one of the attorneys with Creative Planning Legal, and I’m here with my friend and colleague, Chrissy Knopke. And, we also have Matt Mentzer here again with us. He focuses his practice on business and tax planning. And today, we’re going to talk about a concept called portability. Right now, when we’re doing estate planning, we’re really keeping our eye on the estate tax exemption, and trying to make sure we’re doing some estate tax planning for our clients, especially those that have a higher net worth to make sure we’re capturing, especially with married couples, both of their exemptions. So, when they leave assets to their children and loved ones, that we’re trying to minimize any estate tax that might have to be paid. Matt does a lot of estate tax returns, and we pull him in on these clients who need to elect portability. Can you tell us a little bit about that, and how that works, and why that might be a good thing for clients to do?
Matt Mentzer: Yeah, absolutely. Right now the current us exemption is $11.7 million per person. Meaning that, if you have a married family, it’s right around $23.4 million of exemption. But, in order to use that exemption for a deceased spouse, you have to affirmatively tell the IRS that you want to save that remaining exemption. So, very easy example, if we have an $11 million estate and a husband is worth $5 million, there’s $6 million of unused exemption remaining. And we would want to capture that so the surviving spouse could add it to her exemption. In order to do that, you have to file an estate tax return and notify the IRS that you’re giving that unused exemption over to the spouse.
Chrissy Knopke: And there’s a timeframe to filing that, correct?
Matt: Correct. Nine months is what I will tell you all. There are maybe some flex around that, but nine months is the date that you need to know.
Chrissy: Nine months from the date of death, you have to decide whether you’re going to file for portability or not.
Matt: That’s correct.
Chrissy: Pretty much you use it, you do it, or you lose it.
Matt: That’s correct.
Annie: And nine months, just so the listeners know, is that triggering date for other types of state tax planning you might want to do as well. So, that’s just a good timeframe to remember.
Matt: But yeah, especially now, because we don’t know where the exemptions are going to land. It’s $11.7 million today.
Annie: Which is high as it’s ever been.
Matt: High. It’s great. Great.
Chrissy: And we already know it’s sunsetting. So, no matter if Biden/Harris does nothing with it, it’s going to sunset in 2025.
Annie: Actually, 2026.
Matt: Yeah, unless the laws change, which could happen. It could happen tomorrow. It could happen before 2025. But that’s correct, Chrissy.
Annie: If nothing happens, that’s what will happen.
Matt: Yeah. There are some proposals to reduce that exemption from 11.7 million per person down to three and a half, $4 million per person within the Democratic administration now. We don’t know if that’s going to pass or not, but that is one proposal. To Chrissy’s point, at the end of 2025, the exemption is scheduled to drop to $5 million in sunset. That could change. It may not. But, we want to make sure that when we have a deceased spouse, we go ahead, if that’s going to be a consideration, we file that portability return. And that way we’ve captured that unused exemption.
Chrissy: And they may not need it, but it’s there just in case.
Annie: How does that work? What does that mean if they capture the exemption?
Matt: I think in my example, I said there was a husband with $5 million of assets and $6 million of unused exemption.
Matt: Then, his spouse would be able to capture that unused $6 million and add it to her $11 million. So, she could then transfer up to $17 million without her family paying estate tax.
Annie: Right. Or, because the exemption could change before the wife passes away, also.
Annie: So, it maybe $1 million and then she’s got seven.
Annie: Because we don’t know. It’s a kind of a moving target.
Matt: Right. We can absolutely tell you how much exemption you’ll have based on the deceased spouse unused exemption. But we don’t know what the exemption is going to be when you die. So, we at least have some amount that we’ve captured, that we otherwise would waste if we don’t file that portability election.
Chrissy: Right. And then, the only other consideration really is, although it’s a moving target, we also have state death tax, too. A lot of states have essentially gotten rid of their state death tax, but there’s a handful, maybe about a third.
Matt: Probably less than that. There’s probably about 10 states, 11 states, that have either a state tax or an inheritance tax, where the beneficiaries are responsible for paying the death tax. And most states do not have a state portability. So, you may still have to do some planning on the estate planning side to maximize the amount of assets transferring to that surviving spouse, so you’re not paying state taxes upon the death of a first spouse.
Chrissy: Yeah. Lots of considerations when someone passes away, and some time deadlines.
Annie: Right. So, just thank you for sharing that with us, and that’s just one of those things for people to kind of keep in the back of their mind as they’re doing their estate planning.
Matt: Nine months.
Annie: After they lose a loved one, see if they need this as something they might need to do.
Chrissy: Thank you for being with us.
Annie: Great. Thanks, Matt.
Matt: Thank you for having me.
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