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Post: Retirement Hacks: Even without the Mega Millions jackpot, you should probably have an estate tax return filed when you die

Estate planning isn’t top of mind for all Americans, especially when they don’t have millions of dollars they expect to leave behind when they die – but that’s the wrong way to approach the task if they are survived by a spouse. 

Retirement Tip of the Week: Even if you don’t think you’re leaving behind a substantial amount of money – or if your husband or wife didn’t – have an estate tax return filed to reap the benefits of the current lifetime exemption amount. 

Americans are abuzz with news about the Mega Millions jackpot reaching more than $1 billion, and they’re probably dreaming of what they’d do with all of that cash if they won (after taxes, of course). But even if you’re not winning the Mega Millions – or any lottery for that matter – an estate tax return can save a family plenty of money later in life through the lifetime exemption amount, which is currently $12.06 million per individual in 2022. This is the amount a person can give during life or after death without having to pay a 40% gift or estate tax on the transferred money. 

The IRS recently changed the rules regarding how long a surviving spouse can file for a portability extension, which allows them to transfer over any amount of the $12 million exemption the deceased spouse did not use. Widows and widowers now have five years to claim the portability extension, compared to the previously allotted two. First they need to file an estate tax return, though, which is usually due nine months after the deceased passed away. 

Filing for that portability extension now, or in the near future, is crucial, as it will lock in the current exemption amount. That $12 million per individual, which is adjusted for inflation every year, is expected to sunset in 2026, and could be reduced by as much as half. “Even if folks don’t have the $12 million today, they may still elect portability since the estate tax exemption is applicable only at the time of death,” Brandon Opre, a certified financial planner and founder of TrustTree Financial. “People need to look at the potential growth of their estate in conjunction with their life expectancy.” 

If a surviving spouse were to pass on filing an estate tax return and getting the remaining amount of the lifetime exemption added to her own exemption, her family and loved ones could end up paying taxes on an inheritance if she were to die with more than her own limit (especially if it’s reduced drastically in the next few years). That means if she were to win big from a Mega Millions, or a business were to take off significantly between her spouse’s death and her own, she could end up with a lot of money to leave behind, and a lot in taxes for them to pay. 

See: 6 essential estate planning documents every adult needs 

Individuals may also have to file an estate tax return, depending on the state they live in. Some states, such as Massachusetts and Oregon, have filing thresholds as low as $1 million in assets, said James Guarino, a certified financial planner and managing director of Baker Newman Noyes. “When factoring in the value of real estate, retirement plans and other investments, it is not difficult for a decedent’s estate to exceed these lower state exemption thresholds,” he said. 

Estate tax returns can also be helpful if leaving behind inheritances that get a “step-up” in basis after death, such as real estate. A step-up in basis is when the worth of the inherited asset after death, such as the fair market value, is more than whatever the deceased paid for the asset at the time of purchase. Obtaining the fair market value of the asset can be tricky the longer the time period between when the beneficiary inherited the asset and sold it, Guarino said. 

There are other tax-efficient strategies when estate planning outside of the portability claim, though that one is helpful for surviving spouses. Individuals looking to reduce tax burdens after death may want to look into irrevocable life insurance trusts, charitable donations and trusts and giving gifts while living, said Cecil Pope Staton, a certified financial planner and founder of Arch Financial Planning. “With the limit dropping, clients’ estate planning strategies to remove assets from the taxable estate will be more popular.”

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