Clever Estate Planning Tool Can Prevent a $1.6M Tax on Estates

You've heard it before, "Protect Yourself: Get an Estate Plan". But people often ask, "Why?" Estate Planning Attorney Grant Van Der Jagt custom crafts comprehensive, lifetime-guaranteed estate plans for a flat fee at www.Lifetime.Estate, and answers some of the toughest types of questions for prospective clients, who recently voted him as one of Castle Rock Colorado's "Best of the Best" attorneys. Darcy Schoening from the Colorado Herald sat down with Mr. Van Der Jagt at The Law Firm of Starzynski Van Der Jagt P.C. to ask him about what he calls the "Unrepresented Tax". Mr. Van Der Jagt explained, "Many unrepresented married couples unknowingly fall victim to legal mechanisms like the 'portability trap'. By failing to file an IRS form after the death of one spouse, the estate forfeits a massive $12.06M federal estate tax exemption, and although this trap seemingly only applies to the rich, it can actually apply to everyone in what is called the 'Unrepresented Tax'". Knowing many estate plans are downloaded from an online platform, which leave estates unrepresented, Mr. Van Der Jagt continued to demonstrate his mastery of estate planning by explaining how to avoid a $1.6 million tax and a forced sale of the family home.

According to the IRS, the current federal estate tax and gift exemption is $12.06 million. A married couple could transfer $24.12 million to their children or loved ones tax free if they properly plan. "With a tank of gas costing a few million dollars in just a few years", he joked, "this could apply to everyone", but Mr. Van Der Jagt clarified that the exemption is tied to inflation, so it too could rise. So, why should low and middle class citizens be concerned about estate tax if their estate is less than $12.06 million? Mr. Van Der Jagt revealed that if gridlock in Washington continues, legislation effecting laws will automatically drop this exemption to $6 million on January 1, 2026 ($5.49 million indexed for inflation) under current law, and presidential candidate Joe Biden proposed further reducing the exemption to $3.5 million. No one really knows what the long-term future may bring, so creating an estate plan that keeps every opportunity open for even low and middle class citizens is a reasonably prudent effort given the current gift tax rate of 40%. So where is the "portability trap"?

For most families, Mr. Van Der Jagt disclosed, an overall estate plan will leave all or a substantial amount of the estate to a surviving spouse. The largest asset is usually the house and since the average price of homes is rising fast, most families could fall within these exemptions in just the next 4 years (Jan. 1, 2026). Assets left to a surviving spouse qualify for an "unlimited marital deduction" and while the terms "unlimited" and "deduction" would seem like a good thing, the devil is in the details because the transfer can actually trigger higher taxes. If there is not a taxable estate on the death of the first spouse because all assets going to the surviving spouse qualify for the unlimited marital deduction, then the deceased spouse's unused exemption is lost, and the family's estate tax was effectively reduced from $24.12 million to $12.06 million due to poor planning or being unrepresented. "A $1.6 million estate tax bill could have been avoided had the family hired an expert estate planning attorney instead of downloading a form", said Attorney Grant Van Der Jagt. Clever estate planning attorneys have carved out legal tools to prevent the loss of an estate tax exemption as described above. By declaring the estate exemption as property and filing a form with the IRS, an attorney can transfer the unused exemption of the deceased to the surviving spouse. This mechanism is referred to as "portability", but sadly many families are unaware of this opportunity and fail to take advantage of this and other estate planning tools.

Saving $1.6 million in taxes by hiring an expert estate planning attorney to craft your estate plan seems like an obvious decision, if you believe there could be a tax bill of $1.6 million, so we asked Mr. Van Der Jagt to illustrate how he calculates a tax savings of $1.6 million. If a family (husband, wife, kids) has "community property" worth $10 million, and the husband were to die today, one would normally think that they don't need to worry about this estate tax exemption because it is under $12.06 million, and so they will not preserve it. However, if the wife were to live to at least January 1st, 2026 (and we all hope that she does), then the family would be paying $1.6 million in taxes even if the estate does not appreciate in value because the estate tax exemption fell to approximately $6 million on January 1st, 2026, leaving the taxable estate at $4 million at 40%, triggering a bill of $1.6 million, which must be paid in full in cash nine months from the date of the wife's death, with certain limited exceptions. Most families do not have $1.6 million liquid in anticipation of gifting it to the IRS, so a rushed estate sale is usually ordered, resulting in a lower home price, causing further losses to the family.

Other than the cost of hiring the attorney, the only downside to filing for the portability election is the cost of filing the estate tax form (IRS form 706), which can be filed up to two years from the date of death of the initial spouse. (For more information please read IRS publication Rev. Proc. 2017-34). It is important to note, Mr. Van Der Jagt reveals that the valuation rules are relaxed for the filing of an estate tax return solely for the sale of portability. In particular, formal appraisals are not required for a portability-only tax return. Appraisals of business interests and real property can be expensive, so this will help reduce the cost for that filing significantly.