A Critical Step in Estate Planning - Marital Portability

If your spouse passes away, you should make sure that the executor of the estate finishes one important step: filing Form 706 with the IRS in order to elect marital portability.

This is not an automatic election, and many executors will skip filing the form because your estate is "too small". While it's true that current estate tax exemptions are high, there is no guarantee that this will continue in the future. If you have even a modestly large amount of assets to leave to your heirs, they could end up paying a lot of estate taxes that could easily have been avoided. For surviving spouses who want to ensure their heirs don't have to pay taxes on their inheritance, the easiest way is by filing Form 706.

What is the Marital Portability Election?

Individuals currently have an estate tax exemption of $11,580,000 (in 2020). That means that if you have less than that amount saved up in your estate when you die, your estate will owe no taxes. Most people, unless they are very wealthy, don't use up all of their individual estate tax exemption when they die.

Since 2013, spouses are allowed to "inherit" any unused exemption amount to add on to their own, and keep that extra exemption amount permanently. So, for example, if your spouse dies and "only" uses $1M of their $11.58M exemption, the extra $10.58M gets added to your estate tax exemption. That means you now have over $22M as an estate tax exemption for yourself.

"I'm Not Rich Enough for It To Matter"

So why should you care about this?

"I won't ever have eleven million dollars, let alone twenty-two million. Why should I even care about this? I'm way under the exemption amount."

This may be true - for now. But as they say, the only constant in life is change, and it would be wise not to count on things being the same in the future. Here are some possible scenarios where taking the marital portability exemption WOULD matter:

• Laws Change: Consider this scenario - your estate, including your home, is $2M, not enough for you to worry about estate taxes. In 2022, though, a progressive majority is elected to Congress. As part of an overall "wealth tax" initiative, they reduce the exemption amount back to $1M and bump the estate tax rates closer to their historical average, setting it as a flat 50%. If you had filed for marital portability, you would have been able to use your spouse's unused exemption to pay zero taxes on your estate. Instead, your heirs will be stuck paying a half million dollars in estate taxes. (Note that the IRS made the exemption portability PERMANENT - they can't change the laws to take your spouse's unused exemption back once you elect it. They can, however, change the estate tax rate and the estate tax exemption going forward.)

• Life Changes: Years pass. You remarry someone very wealthy but end up divorcing, and in the divorce proceedings you wind up with a good portion of their assets. These assets push your estate up to $15M, above the current exclusion amounts. If you had elected marital portability, you wouldn't have to pay any taxes, but now you will have to pay taxes on everything over your own personal exclusion. (Note that the portability election is for the "the last deceased spouse", so simply remarrying doesn't affect the portable exemption.)
• Luck Changes: You win the Powerball! Okay, so it's not the likeliest scenario, but if you do end up with a winning lottery ticket, you will be kicking yourself for not filing this form. 

What's the Deadline to File Form 706 for Marital Portability?

The IRS says that Form 706 must be filed "timely" - within 9 months of your spouse's death. However, if the only reason you're filing the form is to elect portability, you have up to two years after death to file. And there are other extensions you may be able to take even if you miss the two year deadline. Check as soon as you can with the executor of the estate. 

Who Doesn't Need to Elect Marital Portability?

There is no tax downside to filing Form 706 with the IRS to elect marital portability. The main cost is the upfront cost of filing the form with the IRS - which can range up to a few thousand dollars if you hire a CPA to help you file. It can be a bit of a hassle to organize all of the necessary supporting documents - if you have real estate, for example, it will need an appraisal to support the value being claimed.

So when is it unnecessary to elect marital portability?

• If you are going to donate all your money to charity. The estate tax charitable deduction is unlimited, so if you're planning to leave everything to charity, your estate won't have to pay any taxes anyway. 
• If you don't have children or other heirs. People with no kids often skip marital portability simply because they don't plan to leave money to anyone. 
• If you have children, but aren't going to leave them substantial amounts. As one of our clients likes to say, "I don't want to die with any money left in the bank!" Whether your children are self-sufficient already, or you have already gifted them enough during your lifetime, or you just want to spend your own money on yourself, dang it, you may not plan to leave anything behind. If so, go and enjoy your money now... if you get it just right, you can bounce your last check!
• If you like paying taxes so much that you want to pay extra taxes even after you die. 
• If you hate filling out paperwork so much that the hassle outweighs the potential tax benefit.

Hopefully this helps you understand the potential impact of filing Form 706 to elect marital portability. Do you need to file for marital portability? While you may think it unnecessary now, it's a good idea to at least talk it over with a CPA to see if you should cover your bases with the marital portability election.

As a CPA/PFS and a CFP®, Chris Wentzien is qualified to evaluate your financial situation from a tax-focused perspective, while also keeping in mind the big picture. If you have any questions, don't hesitate to get in contact with us: Contact Page