Currently, the amount of money that wealthy Americans can shield from estate taxes in 2022 is at historic highs. Up to $12 million can be protected for individuals, and double that for married couples. However, that is all set to change in 2026 as this tax benefit will be drastically changing, and the amounts go down to half of the current levels.
How It Works
Typically, when one spouse passes, the surviving partner will inherit a chunk, if not all of the deceased person’s estate. That inheritance becomes tax-free regardless of the size. When the surviving partner eventually passes, and assets are again inherited, is when you can expect the value of the estate to be taxed. Even if the surviving spouse’s individual assets are under 12 million before the inherited amount, the additional value derived from a deceased spouse could push the pot enough to be hit by the excess 40% tax.
However, the means for avoiding this just got easier, with a new July ruling by the IRS that gives surviving spouses 5 years to “lock in” (Portability). The previous period which was established in 2017 was two years, and before that, it was 15 months.
What is Portability
Portability is the “locking-in” process that is only available to taxpayers who do not need to file an estate tax return because their estates aren’t large enough (however, you do need to file an estate return to elect into portability). Electing portability effectively doubles a surviving spouse’s individual exemption in place when the partner died. Effectively, all this means that married couples who do not need to file an estate return because their individual net worth is below $12.06 million, should plan for the estate of a future deceased spouse to file one and elect portability to lock in the surviving spouse’s exemption levels.
Wrap Up
The big advantage here is the added time given to be able to claim portability. The IRS made the change because it was overwhelmed with requests from taxpayers who missed the previous 2-year deadline. If you need further assistance or guidance, call your trusted financial advisor!