Federal Estate TaxEach of us is entitled to a Lifetime Federal Gift and Estate Tax Exclusion ($5.43 million for decedent’s dying in 2015).  You can give this amount away during your life or leave it to anyone at your death without paying any federal gift or estate tax.  It is important to note, however, that for Illinois residents, there is only a $4 million Illinois estate tax exclusion.  This means that it is possible to owe Illinois estate tax at someone’s death without owing any federal estate tax.

So what happens if a married individual’s taxable estate is less than $5.43 million at death?  Is the rest of that person’s federal exclusion amount wasted?  Not necessarily.  Federal law allows a surviving spouse to carry over his/her deceased spouse’s unused exclusion (DSUE) and apply it to his/her own transfers during life and at his/her later death.  This can mean huge tax savings for a married couple IF the proper steps are taken following the first spouse’s death.

As with any tax breaks, you have to follow the rules!  In order to take advantage of this “portability” of the DSUE, the executor of the decedent’s estate (i.e., not the surviving spouse) must file a timely Federal Estate Tax Return (Form 706) and make the portability election on that tax return.  This must be done even if the decedent’s total estate was worth less than the federal exclusion.  If this is not done (with some exceptions), the surviving spouse cannot apply the DSUE to his/her estate and the unused exclusion of the first spouse is lost forever.  Note that Illinois does not allow for portability of the Illinois estate tax exclusion.

So what does this mean for you?  If you are married, portability may help save estate tax if you haven’t done any other estate planning.  It is not, however, a substitute for a good estate plan that takes into account all aspects of your estate and family circumstances, and it will not help at all with Illinois estate tax.

If you have recently lost your spouse, you should talk to an estate tax professional about whether filing a federal estate tax return to elect portability of the DSUE could benefit you.

Read our upcoming article to find out what assets are included in your estate for estate tax purposes—you may be surprised!

Should you have any questions about the Illinois estate tax excultion or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.

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