Has the IRS Made It Easier to Avoid Estate and Death Taxes!?

As estate planning attorneys, a large part of our practice when helping our clients plan their estates, is to also keep in mind their tax exposure - not just at the time of creating a trust, but also when they pass away. This is especially the case due to estate taxes, sometimes affectionately referred to as "Death Taxes." Below, we'll be talking about a new change made by the IRS that actually works in the taxpayer's favor.

Firstly, a small disclaimer, estate taxes are assessed federally, by the IRS, and sometimes at the state level, meaning your state's laws will vary. Here in California, there is no state estate tax. That means the California Franchise Tax Board cannot to dip into your estate after you die outside of your normal final tax return. Federally, however, the IRS does assess an estate tax, but only after an estate reaches above the lifetime gift tax level, which in 2022 is about $12.06 million and is tied to inflation. Meaning, everything beyond this point is only for those whose estate is going to be worth over this $12.06 million limit, a very small section of the population.

Nonetheless, as we are in the realm of taxes, we are in the realm of politics, meaning that if it is politically popular enough, that number can always decrease and therefore wrap more of us within the class of those whose estate are subject to a dreaded estate, or death, tax. Thus, these are benefits to be aware of just in case.

Plunging into the details but keeping matters simple, whether an estate will owe taxes is not determined right at the moment of death, but when it comes time to file taxes after the accounting is done. However, even that is not completely the case as when a spouse dies, the surviving spouse previously had 2 years to determine whether estate taxes were going to be owed on the deceased spouse's estate. However, most of the time, this is, in essence, ignored and the surviving spouse receives everything from the deceased spouse's estate, tax-free, and continues on with their life.

However, when that surviving spouse finally passes, and their estate is worth over the estate tax limit, then the IRS is going to want their due. This is where the recent IRS change comes into play and where you need to know about something called, "portability." Portability is the concept wherein a surviving spouse can elect to take, bring with them, their deceased spouse's unused exemption along with their own.

For example, a husband's estate was worth $10 million at his death, and it all went to his surviving spouse. By the time the surviving spouse died, her estate was worth $14 million, meaning estate taxes are going to kick in on approximately $2 million, right? Well, no, so long as the surviving spouse elected to take her late husband's unused exemption, which happened to be $2 million, and thus no federal estate taxes are owed here, and the children can inherit more from mom and dad without the IRS getting into the middle of it all. Previously, the surviving spouse had 2 years to make this election. Now, the IRS has increased this election period to 5 years meaning a larger window of time to make the election in the hope that more money can stay within in the estate at the end of the day.

On top of all this, previously, to take this portability election, you had to request guidance from the IRS, known as a private letter ruling. Now, so long as you're within that 5-year window, there is no need to go to the IRS and ask, "mother may I take this election please." Now, you simply make the election by filing an estate tax return – something you were likely to do anyway, and now the only way to ensure you receive that portability benefit.

With these changes, it is now that much easier to mitigate estate, or death, taxes that might be owed, all while staying within the bounds of the IRS rules and guidelines. Again, while $12.06 million, indexed to inflation, sounds like a high number, this is set to sunset in 2026, and revert back to between $6.5 and $7 million, of course depending on who controls Congress and the White House at the time.

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