Articles & Blog

Federal Estate Tax Return for Spouses in 2011, 2012 and 2013

Last month the IRS opened a window to correct what could be a potentially costly error to families whom you serve. This pertains to a married individuals who died in 2011, 2012 and 2013, owning a business interest, gas lease (whether or not in production) or any other appreciable asset.  Undoubtedly,  business interests and tangible assets have value.  However, a recent gift tax audit involving one of our clients has confirmed absolutely that the IRS considers gas leases as having substantial value whether or not they are in production. If an individual who owns such appreciable assets  passes away leaving a surviving spouse, it is a common misconception that nothing needs to be done from an estate standpoint.  (This is especially prevalent in the context of non-producing gas leases since they have no value for Pennsylvania Inheritance Tax purposes.) The IRS takes a different view.

Even if the deceased spouse’s assets do not have a value which exceeds the federal estate tax threshold, this fact may change during the life of the surviving spouse. Assume that the deceased first spouse’s assets have a value of $3 million on the date of death. Obviously, no Federal Estate Tax or Pennsylvania Inheritance Tax is due. The misconception is that no action needs to be taken, including the filing of a form 706 Federal Estate Tax Return. However, if on the death of the surviving spouse the same assets have  a value of $7 million due to appreciation, there will be approximately $1.3 million of assets exposed to Federal Estate Tax (which is roughly 40%). This could have been avoided if the 706 was timely filed on the death of the first spouse and portability elected. If that were the case, the second spouse to die would have exemptions of approximately $10.6 million and no federal estate tax would be due. As you can see, there is a significant savings to the family.

A procedure is currently available to correct this error for individuals who passed away in 2011, 2012 and 2013. However, this opportunity will expire on December 31, 2014.

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