TL;DR: Is it beneficial to file an estate tax return at the first spouse's death, in order to preserve his estate tax lifetime exemption amount?
Hi All,
I'm a financial planner (who is not also a lawyer) working with somebody whose husband died a few months ago. The size of the husband's estate was roughly $4.5 million, which includes his retirement accounts, half of non-retirement brokerage balances, half of bank cash, a life insurance policy, half of their house, and some other assets. She said that her estate lawyer said that no Federal estate taxes are due, and so no estate tax return needs to be filed. Immediately, it sounded potentially wrong to me - her husband left everything to her, and to preserve his estate tax lifetime exemption, I understand she HAS TO file an estate tax return. If this means nothing to you, then I'm happy to explain in the next few paragraphs what I'm worried about, and how I understand this works. (Need to confirm my understanding with y'all.)
Her current net worth is $8+ million dollars, which includes everything she inherited. The lifetime estate tax exemption currently (2024) is $13.6 million, so this much can pass to heirs estate tax-free. She has nothing to worry about then, right? Wrong, for the following reasons:
1) This $13.6 mil amount is scheduled to revert back to the estimated $7 million in early 2026 (it's inflation-adjusted, so the amount is approximate). This means everything over $7 mil will be estate-taxable when she dies.
2) She has a good 25-30 years left in her life expectancy, so her net worth / estate may grow significantly by the time she dies.
Her kids will get whatever the lifetime exemption is in the year of her death, estate tax-free from her - but do they get to inherit their father's lifetime exemption amount, that passed first to her, and then to them, also estate-tax-free? NO, THEY DON'T - and that's the problem here. To avoid it, I understand she can file an estate tax return, and effectively say to the IRS: "Hey, I want to preserve my diseased husband's estate tax lifetime exemption amount" (or, well, $4.5 million of it, because that was the actual size of his estate). Then when she dies, her kids can save the estate tax on up to this $4.5 mil, if the estate is large enough. That tax is 16%, so we're talking up to $720,000 in potential tax savings. This money WILL go to the Feds at her death (again, assuming the estate is large enough over her own lifetime exemption amount) - except if she files an estate tax return in the next couple of months (the deadline is 9 months after death, so the time is running out).
So, I was surprised to hear that her estate lawyer had said she shouldn't file an estate tax return. This stuff is pretty basic for estate lawyers to understand, OR SO I THOUGHT - so of course my next thought was, hey, maybe I am the one who doesn't get something here. And this is my question for you all - am I missing or misunderstanding something here?
I sent her the exact language to send to her lawyer, suggesting that she tells him that her "financial advisor is thinking we might want to file the estate tax return, at least for portability of [the husband's] lifetime exemption amount, and maybe also for other reasons". (Hedging language, recognizing I might be wrong, and deferring to their expertise). She takes some time on this, for some reason talks to her accountant and not to the lawyer, and eventually comes back to me saying "The accountant sees no benefit to spending time and $ on the Federal filing if it's not required."
OK. I can totally see just dropping the issue at this point - I did my job here. Alternatively (and that's where I am leaning), I should show her this math on the $720k taxes her kids might have to pay, if she doesn't act now.
But also (and really, this is my only question for you guys here) - AM I F&#%@ING WRONG HERE?
Hi All,
I'm a financial planner (who is not also a lawyer) working with somebody whose husband died a few months ago. The size of the husband's estate was roughly $4.5 million, which includes his retirement accounts, half of non-retirement brokerage balances, half of bank cash, a life insurance policy, half of their house, and some other assets. She said that her estate lawyer said that no Federal estate taxes are due, and so no estate tax return needs to be filed. Immediately, it sounded potentially wrong to me - her husband left everything to her, and to preserve his estate tax lifetime exemption, I understand she HAS TO file an estate tax return. If this means nothing to you, then I'm happy to explain in the next few paragraphs what I'm worried about, and how I understand this works. (Need to confirm my understanding with y'all.)
Her current net worth is $8+ million dollars, which includes everything she inherited. The lifetime estate tax exemption currently (2024) is $13.6 million, so this much can pass to heirs estate tax-free. She has nothing to worry about then, right? Wrong, for the following reasons:
1) This $13.6 mil amount is scheduled to revert back to the estimated $7 million in early 2026 (it's inflation-adjusted, so the amount is approximate). This means everything over $7 mil will be estate-taxable when she dies.
2) She has a good 25-30 years left in her life expectancy, so her net worth / estate may grow significantly by the time she dies.
Her kids will get whatever the lifetime exemption is in the year of her death, estate tax-free from her - but do they get to inherit their father's lifetime exemption amount, that passed first to her, and then to them, also estate-tax-free? NO, THEY DON'T - and that's the problem here. To avoid it, I understand she can file an estate tax return, and effectively say to the IRS: "Hey, I want to preserve my diseased husband's estate tax lifetime exemption amount" (or, well, $4.5 million of it, because that was the actual size of his estate). Then when she dies, her kids can save the estate tax on up to this $4.5 mil, if the estate is large enough. That tax is 16%, so we're talking up to $720,000 in potential tax savings. This money WILL go to the Feds at her death (again, assuming the estate is large enough over her own lifetime exemption amount) - except if she files an estate tax return in the next couple of months (the deadline is 9 months after death, so the time is running out).
So, I was surprised to hear that her estate lawyer had said she shouldn't file an estate tax return. This stuff is pretty basic for estate lawyers to understand, OR SO I THOUGHT - so of course my next thought was, hey, maybe I am the one who doesn't get something here. And this is my question for you all - am I missing or misunderstanding something here?
I sent her the exact language to send to her lawyer, suggesting that she tells him that her "financial advisor is thinking we might want to file the estate tax return, at least for portability of [the husband's] lifetime exemption amount, and maybe also for other reasons". (Hedging language, recognizing I might be wrong, and deferring to their expertise). She takes some time on this, for some reason talks to her accountant and not to the lawyer, and eventually comes back to me saying "The accountant sees no benefit to spending time and $ on the Federal filing if it's not required."
OK. I can totally see just dropping the issue at this point - I did my job here. Alternatively (and that's where I am leaning), I should show her this math on the $720k taxes her kids might have to pay, if she doesn't act now.
But also (and really, this is my only question for you guys here) - AM I F&#%@ING WRONG HERE?
Statistics: Posted by seugene — Sat Jul 13, 2024 10:35 am — Replies 0 — Views 11