Many estate planning commentators have joked that estate tax portability will lead to rich individuals marrying others simply to make use of their estate tax exemption. I have found, in practice, that planning can be far more complicated.
Let me take you through a common situation that I am dealing with:
- I represent a wealthy person (let's say $10M+) who is married to someone not as well off, but not poor (about $1M);
- Each spouse has children from a previous marriage; and
- The spouse who has less money has no real desire to give money to the surviving spouse and wants everything to go to his/her children.
I'll call the wealthy person Wendy and the less wealthy spouse Harry. In a situation like this, if Harry dies first, and leaves his entire $1M to his children, then he will only have used up $1M of his $5.43M federal estate tax exemption. Wendy is entitled to receive the Deceased Spouse's Unused Exemption Amount (DSUEA) of $4.43M. This concept is known as portability and would increase what she can pass on to her children tax free from $5.43M to $9.86M - an estate tax savings of $1,772,000.
Now, if Harry is leaving everything to his children, it is likely that one of them is the Executor, and not Wendy. This is important because the only way for Wendy to receive the DSUEA is for the Executor of Harry's estate to file a federal estate tax return. Harry's executor might not want to incur the trouble or expense of filing a return that does not benefit them in any way. After all, there is no need to file the federal estate tax return if the estate is less than $5.43M.
If Wendy gets along well with the Executor, she can agree to pay for the return, but that is no guarantee. The safest approach to ensure that Wendy has access to Harry's DSUEA is to get Harry to redo his Will and make a specific bequest of his DSUEA to Wendy AND require the executor to file the federal estate tax return (or do whatever is necessary to ensure that the wealthier spouse actually gets to port his unused estate tax exemption amount).
Harry can of course require that Wendy pay for all costs associated with such return, which I would imagine she would be happy to do. After all, a federal estate tax return, even on the expensive side, is likely to save Wendy's heirs millions of dollars.