Save estate tax costs with exemption portability

Federal estate tax exemption portability represents a huge potential benefit for many estates that should not be overlooked.

Are there any changes to the estate tax law relative to the amount that can pass tax free at death?

With the rules constantly changing, it has become more important than ever to be aware of unique estate-planning techniques and how to utilize them properly. Estate taxes are one of those issues that everyone seems to be talking about, but few understand the complexities of the ever-changing laws. For the vast majority of married physicians, when it comes to defining estate tax planning goals, the focus is on minimizing estate tax liability and ensuring that assets flow to their designated beneficiaries. The general standard is that the estate is available for the surviving spouse, then passes on to the next generation.

Federal estate tax exemption portability represents a huge potential benefit for many estates that should not be overlooked. Hundreds of thousands, if not millions, of estate tax dollars can be saved through proper utilization of the portability provisions.

Under current federal estate tax laws, a decedent’s estate is allowed an exemption from estate taxes up to an amount indexed for inflation. For deaths occurring in 2013 and 2014, the exemption amounts are $5.25 million and $5.34 million, respectively. Portability of this exemption between married couples means that if the first spouse dies and the value of their estate did not require the use of all of their exemption, then the unused amount of the exemption may be used by the surviving spouse, thereby increasing their exemption when they die. A comparative example will help show the benefits of portability.

The scenario: John and Mary are married and have all their assets jointly titled, with their net worth being $8 million. John died in 2013, and then Mary dies in 2014.

First example. No portability has been elected. Under this scenario, John’s estate will not need to use any of his $5.25 million exemption, since all of the assets are jointly titled and the unlimited marital deduction under the federal estate tax law will allow John’s share of the joint assets to be transferred to Mary without incurring any federal estate taxes. If the estate is still worth $8 million upon Mary’s death, she can use only her $5.34 million exemption and therefore has a taxable estate of $2.66 million. With an applicable estate tax rate of 40%, Mary’s estate would have an estate tax liability of $1,064,000 ($2.66 million times 40%).

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Second example. Portability has been elected on John’s estate tax return (form 706). With portability, Mary’s estate would owe no tax. This is because with portability, John’s entire $5.25 million exemption is transferred to Mary, plus a $90,000 inflation adjustment to bring it to $5.34 million, to give her a combined exemption of $10.68 million. Since the exemption greatly exceeds the $8 million value of the estate, Mary’s estate pays no estate tax. Thus, portability has saved Mary’s beneficiaries $1,064,000 of estate taxes.

Clearly, portability is beneficial to estates. However, there are several caveats. First, portability does not occur automatically-it must be elected. Therefore, executors of estates working with their tax advisers, accountants, and estate attorneys must make certain that the election is made. Since the election can only be made on a timely filed estate tax return, executors often will have to file an estate tax return on behalf of a decedent, even if the decedent has no taxable estate, in order to preserve the portability of the unused estate tax exclusion.

Second, many states do not follow federal law on portability with respect to their own state estate tax. Therefore, one must calculate a higher state estate tax when doing estate tax planning, if most of the assets of the estate in question are in a state that does not allow portability of the exemption.

Portability does not eliminate the necessity for careful and in-depth estate tax planning. The best plan of action is to schedule some time with your estate-planning attorney to ensure that your documents are up to date regarding your personal wishes, and at the same time accomplish your estate tax minimization goals.

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What are the individual retirement account/401(k) retirement plan limits for 2014?

Regardless of your age, retirement planning is essential in order to be prepared and comfortable in the golden years of life. Your goal should be simple: Maximize your income potential and utilize tax-advantaged retirement savings plans to ensure your future financial security. The following summarizes the more common retirement plan contribution amounts for 2014:

• IRA contribution limit and catch-up contribution: $5,500 and $1,000; no change from 2013

• Simplified employee pension plan and defined contribution plan contributions: $52,000; up from $51,000

• 401(k) contribution and catch-up contribution: $17,500 and $5,500; no change from 2013

• SIMPLE (Savings Incentive Match Plan for Employees) contribution and catch-up contribution: $12,000 and $2,500; no change from 2013.UT


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