Surviving Spouses Need To Be Aware Of Potential Changes To The Estate Tax

Clients who have lost their spouse within the past two years may want to speak to us if his or her estate is close to $6 million.

Why? Because there are pending tax proposals before Congress that would reduce the current $11.7 million exemption down to approximately $6 million on January 1, 2022, as opposed to current law which reduces that amount on January 1, 2026.

The reason this is important for surviving spouses is that married couples are allowed to use their combined estate tax exemption (it is called “portability”). So, for example, right now a couple could claim a $23.4 million exemption. If the current tax proposals pass, on the other hand, that same couple will only be able to claim a roughly $12 million exemption, as of January 1, 2022.

A big caveat—in order for couples to combine their exemptions, the surviving spouse must file a tax return for the deceased spouse within two years of his or her death or lose that spouse’s entire exemption. By way of example, if a couple has $7 million in assets and one spouse passes away, while the deceased spouse may have had an $11.7 million exemption, once the laws change the surviving spouse is only going to have a $6 million exemption. Therefore, the surviving spouse will need to file a tax return to claim the deceased spouse’s exemption and shelter that extra $1 million.

Due to the high estate tax exclusion amounts, many of our clients have chosen not to file the estate tax return and claim the deceased spouse’s exemption. But with the tax laws potentially changing sooner than anticipated, it would be prudent for spouses who have lost their spouse within the past two years to reconsider their choice.

Who should contact us? Spouses who have an estate over $6 million obviously need to contact us to discuss avoiding estate taxes. But even those who are a hare below that threshold should also contact us to discuss, as their estate may grow beyond $6 million during their lifetime. Additionally, tax laws are always subject to change; in other words, Congress can reduce the estate tax threshold even further.

Strauss Attorneys stands ready to help you navigate these issues.