From “The Complete Book of Wills, Estates and Trusts,” by Bove:
The surviving spouse should file a Form 706 for the first spouse to die. This enables the estate tax deduction (currently over $10 million) to be applied to the first spouse’s estate. Any remaining estate tax deduction can then be added to the surviving spouse’s estate tax deduction.
Example:
Spouse #1 has an estate of $5 million.
Spouse #2 has an estate of $9 million.
If Spouse #1 dies and a Form 706 is not filed, the estate passes tax-free to Spouse # 2. Then Spouse #2 has an estate of $14 million of which $4 million is subject to 40% estate tax on her death = $1.6 million tax.
If Spouse #1 dies and a Form 706 is filed, the estate tax deduction means that there is no estate tax. Now $10 M minus $5 M = $5 M can be added to Spouse #2’s estate tax deduction = $15 million. Since this is more than Spouse #2’s estate, NO estate tax will be owed.
This brings up an interesting question. If spouse 1 dies, files estate tax forms, and “carries over” $5M deduction, but then a few years later tax law changes, perhaps with only a $3M deduction, does spouse 2 still have that excess $5M deduction from spouse 1 (who died under old tax law)?
It still brings up a question. If spouse 1 under $10M law had $5M remaining, and then law changes to $9M, does spouse 2 have an additional $4M from spouse 1? That essentially means applying the new law to spouse 1 who died under old law.
@MarkR it’s impossible to predict how new tax laws will be written. As soon as the new one is in place the old one is forgotten.
This cost me significant money in 2018-2019. The 2017 tax law temporarily reduced the Federal income tax which will “sunset” for individuals in 2025.
I saw this as an opportunity to gradually convert my Traditional IRA to a Roth IRA during this interval and pay the lower tax. (Carefully staying below the higher tax bracket.) I converted $100,000 in 2018. What I didn’t realize was that this would increase our household income over the IRMAA Medicare limit (which I had never heard of before), raising our Medicare premiums for the next year.
Yikes!
I immediately acted to reverse the Roth → Traditional IRA conversion (in order to bring our income down). This had always been allowed in the past. But for some unknown, diabolical reason the 2017 law suddenly disallowed the Roth → Traditional IRA conversion!!!
The increased Medicare premiums cost us hundreds of dollars over the next year. I never made that mistake again!
Takeaway: You are stuck with the new tax law, whatever it may be. Congress is unpredictable. The laws may have “gotchas” from unexpected directions. Double-check all assumptions before acting. If the law is favorable to you now, do what you can because there’s no knowing how it will change later.
The only thing we know for sure: The government will need a lot more money in the future, which means higher taxes.
WendyBG, I believe you are wrong about how things work with regard to what is known as “portability” of the estate tax exemption from the first spouse to die to the surviving spouse.
If Hubby dies today and Wifey properly claims his (almost) $13M exemption via “portability”, that $13M will be added to whatever her estate tax exemption is, when she dies. The $13M is “locked in”, regardless if the future estate tax exemption is lowered, as is scheduled on 1/1/2026. So, I believe it’s incorrect that “ported” amount decreases if and when the estate tax exemption decreases. (Although the “ported” amount also does not rise with inflation. If Hubby dies young and Wifey lives 40 more years, this could be an issue.) Yes, the second-to-die spouse only gets the estate tax exemption in force at the time of death. But this DOES NOT decrease the “previously ported” estate tax exemption, from the first spouse to die. That amount was “locked in” and claimed based on the allowed amount at the time of death of the first spouse. Under the current law, if Hubby dies today and his estate tax exemption is “ported”, if Wifey dies in 2026, the total amount that can pass estate tax free is about $20M (his previously claimed $13M and her 2026 amount of about $7M).
So WendyBG is correct that the estate tax exemption in effect at the time of death is what’s allowed. But she is incorrect about applying a future lower estate tax exemption to a prior death’s ported higher exemption. Once you die and claim the exemption, that claimed amount is locked in (but not inflation protected), regardless of future lower estate tax exemption limits, for people who die in the future.