Estate Tax Oversight That Could Cost Families Millions
One family faced an unexpected tax burden of $1.5 million due to a critical estate planning error that could have been easily avoided.
A misstep in Bill’s estate planning resulted in an additional $1.5 million in taxes. While the U.S. tax code offers generous provisions for passing wealth to heirs tax-free—especially with recent changes under the new tax law—married couples must adhere to strict regulations to fully benefit. A single oversight can have devastating financial consequences.
Understanding Portability:
Portability allows a surviving spouse to utilize any remaining estate-tax exclusion from the deceased spouse, provided a proper estate return was filed. Unfortunately, many families don’t review these details until the second spouse passes away, at which point it may be too late to rectify any errors.
The Tax Court ruled that Bill’s estate could not access his wife’s unused exclusion of $3.7 million due to the earlier misfiling, leading to the hefty tax bill. This serves as a stark reminder to affluent families: acquiring the double estate tax exemption for married couples is not automatic—it’s a potential trap for the unwary.
The Stakes:
Recent increases in the estate-tax exclusion amount amplify the significance of this issue. The current threshold is $13.99 million per individual, increasing to $15 million per person for deaths in 2026, with future adjustments for inflation. With estate taxes levied at a rate of 40%, couples who forfeit the $15 million exclusion for the first spouse could face an additional tax liability.
Typically, there’s no obligation to file an estate-tax return when the first spouse dies if the estate falls below the exclusion threshold. The surviving spouse inherits the deceased’s estate tax-free and can carry over the deceased spouse’s unused exclusion, significantly enhancing the survivor’s tax shelter.
For most surviving spouses, a $15 million exclusion sufficiently protects their estates from taxes, and they may not require the full $30 million available to married couples.
Proactive Measures:
For estates valued between $15 million and $30 million, filing an estate-tax return upon the first spouse’s death to elect portability is critical. Failing to do so can lead to dire financial consequences. Even individuals with estates valued below $15 million today could benefit from their spouse’s unused exclusion in the future, as investments grow or unexpected inheritances or windfalls occur.
The moral of this story is to make sure your estate tax attorney is a certified estate planning specialist that understands portability.
Update your estate plan today. Call the Trust Dr. (W. Bailey Smith) who is a Certified Estate Planning Specialist at (949) 833-8891. He has created over 8,000 trusts!
