Planning for the future is an act of love, ensuring that your hard-earned assets are distributed the way you intend while preserving wealth for your loved ones. However, navigating the legal and financial jargon surrounding estate taxes can be daunting. Two essential concepts that can help mitigate federal estate taxes are the portability election and the use of credit shelter trusts. Here’s a breakdown to help you understand these powerful tools and how they could play a role in your estate planning.
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What Are Federal Estate Taxes?
Federal estate taxes are levied on the transfer of a deceased person’s estate to their heirs. This tax is only assessed if the value of the estate exceeds a certain threshold, known as the federal estate tax exemption. While estate taxes were designed to tax the wealthiest estates, changes in law (such as the sunset clause discussed below) could have a significant impact on more American families in the near future.
What Is the Current Federal Estate Tax Exemption?
As of 2024, the federal estate tax exemption is set at $13.61 million per individual or $27.22 million for married couples. This means that if your estate falls below this amount, federal estate taxes will not apply. However, there’s a caveat—this exemption is not set in stone.
The Sunset Clause and Its Impact
Under the existing tax laws, the current federal estate tax exemption is scheduled to sunset on January 1, 2026. When this happens, the exemption will revert to the lower pre-2018 levels—approximately $5 million per individual, adjusted for inflation. This change means that many estates that were previously exempt from federal estate taxes may now be subject to them, potentially creating complications and unnecessary taxes for your beneficiaries if your current estate planning (or lack of estate planning) doesn’t compensate for this change.
If the projected reduction in the exemption level concerns you, now is the time to create or revise your estate plan to address these changes effectively.
When Are Federal Estate Taxes Assessed?
Federal estate taxes are assessed upon the passing of an individual and are calculated based on the gross value of the estate, including properties, investments, retirement accounts, and other assets owned by the deceased. For a married couple, federal estate taxes are generally not assessed until the death of the second spouse due to the unlimited marital deduction. It’s important to know that there are numerous planning strategies that a surviving spouse can utilize to reduce or eliminate federal estate taxes upon their death.
What Is the Portability Election and How Do You Claim It?
The portability election allows a surviving spouse to claim the unused portion of their deceased spouse’s federal estate tax exemption. Essentially, it enables married couples to maximize their combined exemption amount without needing complex estate planning structures (like trusts) in every scenario.
For example, if Spouse A passes away without using any of their current $13.61 million exemption, Spouse B can claim that unused portion, effectively increasing their exemption to $27.22 million (assuming Spouse B also has their own exemption intact).
To claim the portability election, the executor of the deceased spouse’s estate must file IRS Form 706, also known as the United States Estate (and Generation-Skipping Transfer) Tax Return, within nine months of the deceased’s passing. Extensions may be available, but it’s critical to meet this deadline to avoid losing the opportunity.
How Does a Credit Shelter Trust Play Into the Portability Election?
A credit shelter trust is a vital tool in estate planning when trying to minimize estate taxes. This type of trust preserves the deceased spouse’s federal estate tax exemption and ensures that the assets held within the trust are not subject to estate taxes upon the surviving spouse’s death.
Here’s how it works in practice:
- When Spouse A passes away, their assets (up to the exemption amount) are placed into the credit shelter trust rather than directly passing to Spouse B.
- Spouse B can benefit from the credit shelter trust’s income or principal but does not legally own the assets.
- When Spouse B passes away, the assets in the credit shelter trust are excluded from their estate, bypassing further taxation.
Combining Credit Shelter Trusts with Portability
While the portability election is useful, it doesn’t account for future growth and appreciation of estate assets. By combining the portability election with a credit shelter trust, families can optimize their estate planning. For example, a trust locks in the exemption amount and shields appreciating assets from future estate taxes, while portability protects additional unused exemptions.
Taking the Next Steps
The impending sunset clause in 2026 makes it more important than ever to revisit your estate plan. Leveraging tools like the portability election and credit shelter trusts requires precise timing and legal expertise but can provide significant financial benefits for your family.
If you’re feeling overwhelmed or unsure about where to start, know that you’re not alone. Our team is here to support you with compassionate guidance and expert advice tailored to your unique situation. Together, we can ensure your estate plan aligns with your wishes and adapts to upcoming changes in tax law.
Secure Your Legacy Today
Don’t wait for critical changes in tax law to take action. Schedule a consultation with Cornerstone Legal to discuss how portability elections or credit shelter trusts can empower your family and secure your legacy. Contact us today to get started!
Call us at (517) 708-2222 or email Katrina@CornerstoneLegalPLLC.com.
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