One Form Can Save You $2 Million

You’d have to be paying very close attention to recent IRS comments to know that your potential estate tax just went down $2 million. How is this possible? Aren’t taxes going up everywhere? Not for some wealthy folks and their heirs. Does this apply to you? Here’s what the IRS has posted lately.

Death and taxes
They say you can escape everything but death and taxes. “They” were half right; no one lives forever. But you can escape a lot of tax when you pass away, perhaps all federal ones. And now your heirs may be eligible to escape an additional $2m of taxes on what you leave.

“Portability,” your new tax friend
At your death you can pass on $5.5 million to heirs – called “the unified tax credit” or UTC –  without any estate tax payable. For example, you can pass $5.5 million of assets to the kids, federal tax-free.

But if you bequeath less than that to kids, or choose to leave everything to your surviving spouse, you have the option to pass any unused portion of your UTC to your spouse, for use upon his or her death. This is called portability, which is activated via one vital step: filing Form 706.

Thanks to Form 706, your spouse then has a UTC of up to $11m to use at death. Everything shielded from estate tax avoids the onerous 40 percent rake by Uncle Sam. So this could mean an extra $2m in taxes saved by your heirs.

Like all things IRS, it’s a little confusing. Here’s an example. You bequeath $2m to kids upon your death, with everything else going to your spouse. With Form 706 your executor passes the unused $3.5m UTC to your spouse. Upon death she has 5.5 + 3.5 = $9m exemption from estate tax.

Of course, talk to your accountant and estate advisor on this. I am neither.

Learn to love Form 706
Portability has been around since 2011 but it has taken this long to get clarity from the IRS about how to use portability and when. Simply put, you have 9 months after the death of a spouse to file Form 706 to secure your portability, six months more if you file for an extention in those first 9 months. After that, portability is gone.

So if you want to demonstrate your love after you’re gone, consider leaving a note in your desk: “Don’t forget Form 706” in big block letters.

Again, be sure to talk to your estate planning attorney for details.

John Osbon – josbon@osboncapital.com