Many Estates Can Save By Filing ‘Optional’ Tax Returns

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A federal estate tax return doesn’t have to be filed every time someone dies. In fact, most estates never have to file one. However, a provision in the new “fiscal cliff” tax law may make it very advantageous to file an estate tax return if the deceased person is survived by a spouse – even if a return is not legally required.

Here’s why: Generally, when a person dies, his or her estate can give an unlimited amount to a surviv­ing spouse. After that, if the persons bequests (plus large lifetime gifts) total more than a certain “exemp­tion amount,” then an estate tax is due. For 2013, the exemption amount is S5.2S million.

Traditionally, the exemption amount applied separately to each spouse. So if a husband died first, his estate could use his exemption amount, and when his wife died later, she would get her own exemption amount.

But under a change in the law starting in 2011, if the first spouse to die doesn’t use all of his or her ex­emption amount, the difference can be passed along to the other spouse. (The 2011 law was temporary, but the new “fiscal cliff” law makes it permanent.)

So suppose a husband dies and doesn’t use any of his S5.25 million amount (because he leaves everything to his wife). When the wife dies, her exemption amount will be her own $5.25 million plus the $5.25 million that the husband didn’t use. So instead of being able to leave $5.25 million tax-free to her heirs, she can leave $10.5 million tax-free – a potential sav­ings of millions of dollars.
However, this only works if the husband’s estate filed an estate tax return and elected to pass the exemption amount on to his wife. If the husband’s estate didn’t file a return (because it wasn’t legally required), then all the potential tax savings are lost.

This means that it’s almost always a good idea to file an estate tax return for anyone who dies and is survived by a spouse.

Even if it seems highly unlikely that a surviving spouse will be worth more than $5.25 million when he or she dies, it’s still a good idea to file a return, because Congress could always change the exemp­tion amount. In fact, if not for the “fiscal cliff” law, the exemption amount this year would be only $1 million.