Column: Estate planning for the surviving spouse

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It is difficult enough to lose a loved one. No one wants to think about finances or taxes at the time a family member passes away. However, it is important to seek the right advice when settling an estate.

The IRS historically requires the final tax return to be filed within nine months of passing. Sometimes the estate is not even settled by then, much less all the planning that goes along with it.

One of the often-overlooked opportunities is for the surviving spouse to claim any unused estate exemption from the deceased. Many people have become complacent about claiming a deceased spouse’s estate exemption due to the recent high limits, currently at $12,060,000. However, once the current tax law sunsets at the end of 2025, those exemption limits will fall back to 2017 rates plus inflation or roughly $6 million. Therefore, it is always a good idea to go ahead and file the IRS Form 706 to elect portability, or the ability to transfer any unused exemption to the surviving spouse.

Thanks to a new rule recently passed, Revenue Procedure 2022-32, the time to file a Form 706 is now extended to five years after death.

This could be extremely important in the case of a spouse wanting to utilize the deceased partner’s full estate tax exemption. No one likes to pay taxes and the default is to pass the buck to the surviving spouse and not worry about claiming an exemption on the first death. But then the kids or remaining heirs will need to deal with any estate taxes upon the second death. The estate exemption could be considerably smaller by then and the value of the estate could continue to grow, causing a tax liability that could have been avoided.

Now you can go back five years on anyone who passed away and file the IRS Form 706 to elect spousal portability. This means whatever my spouse’s exemption would have been gets carried over to me and added to mine. This gives my kids much more flexibility to use both of our exemptions to the maximum.

The new Revenue Procedure 2022-32 extends the time to make the election to five years after the first spouse’s date of death. This rule is retroactive in that it allows estates of first spouses who passed away less than five years ago to make the portability election if a Form 706 has not already been filed.

This is a significant estate planning tool that can be used to pass on more assets to the surviving spouse and heirs. This allows more gifting opportunities from the surviving spouse and provides a much larger exemption when it comes time to settle the second estate. For additional information, refer to the IRS website at IRS.gov.

This article is for educational purposes only. Patricia Kummer has been in the financial services industry for over 35 years and is a Certified Financial Planner professional and a Managing Director with Mariner Wealth Advisors.

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