A common belief that many California residents have is that there are no estate or inheritance taxes due when they die. This is because California does not have any estate or inheritance taxes at a state level. Currently 17 states impose estate or inheritance taxes such as Connecticut, Hawaii, Illinois, Iowa Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode island, Vermont, and Washington. This means that if you live in one of these states, when you die your estate will be taxed accordingly.
While Californians pay a number of taxes for many other things, luckily we do not have estate or inheritance taxes. When you pass away your estate is passed to your heirs or beneficiaries without a reduction in what is being passed along in the form of taxes. However, that is only in relation to California’s taxes. It is important to remember that there are two tax systems that must be considered: state and federal.
The Federal Government does have estate taxes. However, for most Americans, the size of your estate has to be substantial for the Federal Estate Tax to be applicable. Presently, the filing threshold for 2022 is $12,060,000 per spouse. This means that both spouses have up to $24,120,000 before estate taxes are owed. But when taxes are owed, the tax is substantial as the rate is 40%. This is why advanced estate planning techniques are so important for high-net-worth individuals. Working with an estate planner who will help to reduce your estate tax liability is a valuable part of advanced estate planning.
But what about “regular” people who do not have assets or a total net worth anywhere near $24,120,000? Why should they care about federal estate tax rules?
Over the past 20 years, the trend for estate tax exemptions has been to increase the exclusionary amount every year. This means that the value that triggers when estate taxes are due has continued to rise. As noted above, the exclusion amount is currently $12,060,000 per spouse. In 2021 it was $11,700,000 per spouse. In 2020 it was $11,580,000. For 2019 it was $11,400,000; 2018 was $11,180,000, 2017 was $5,490,000, 2016 was $5,450,000, 2015 was $5,430,000, 2014 was $5,340,000, 2013 was $5,250,000, 2012 was $5,120,000, and 2011 was $5,000,00.
The present administration has made it known that the trend of increasing the exclusionary limit stops now and the amount will be decreasing. Starting January 1, 2026, the exclusion amount will be decreased to approximately $6.4 million per person. It is possible that this amount may continue to drop in future years. If you go back to 2002, the exclusionary limit was only $1,000,000. If you own a home near Roseville, you may already be over the 2002 limit. It is uncertain where the future exclusionary limits may be set. This lack of clarity has many concerned about how to best protect their estate for taxes.
A current recommendation among most estate planners is to file a federal portability election upon the death of the first spouse to ensure that the higher exclusionary limits presently available are captured. To capture the high exclusionary limits, you can file an estate tax return to claim the deceased spousal unused exclusion (DSUE) amount. This allows you, as the surviving spouse, to bring over or port your spouses’ exclusionary values to the entire estate. The election to transfer a DSUE amount to a surviving spouse is known as the portability election.
An estate tax return to transfer any DSUE amount to a surviving spouse must be filed timely. The due date of the estate tax return is nine months after the decedent’s date of death. However, you may request a six-month extension by filing Form 4768 on or before 9-month deadline is up.
If you are interested in claiming the DSUE for your spouse’s half of the estate, but the deadline for filing has already past, you may still have options available. Revenue Procedure 2022-32 provides a simplified method for certain taxpayers to obtain an extension of time to make a “portability” election under §2010(c)(5)(A) of the Internal Revenue Code. The simplified method under the revenue procedure to obtain an extension of time to make the portability election requires the filing of a complete and properly prepared estate tax return on or before the fifth annual anniversary of the decedent’s date of death and requires a notation on the estate tax return that the return is “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).”
Even if your estate is nowhere near the exclusionary limits, again a recommendation is to file a Portability of Deceased Spousal Unused Exclusion (DSUE) election on IRA Form 706. This will ensure that if limits continue to decrease, you will have the presently available exclusionary amounts applied for when your spouse passed away.
If the decedent died testate, a certified copy of the will must be attached to Form 706. If the decedent created a trust, a copy of the trust must be attached.
If you are interested in learning more about 706 portability elections Deceased Spousal Unused Exclusion (DSUE), please contact one of our attorneys to setup a free consultation to address the options available.
