The sweeping tax overhaul signed into law on December 17 raised the federal estate tax exemption to $5 million per person – and includes a provision allowing spouses to each preserve and transfer their own federal exemption amount to a surviving spouse, without the necessity of a bypass trust. Though the term does not appear in the law, estate planners are referring to this as “portability.”
The law doesn’t change the fact that you can give an unlimited amount to your spouse, during life or through your estate plan (provided he or she is a U.S. citizen) with no tax applied. But until now, without proper planning, when the second spouse died anything above the exempt amount would be subject to federal estate tax. In other words, the first spouse’s exemption was lost. Bypass trusts (what we call the “Family Trust”) were commonly used to address this issue. On the surface, some may try to sell you on the idea that “Portability” now makes the bypass trust unnecessary (in 2011 and 2012, the extent of this provision’s current lifetime) and that would be true if all we were interested in was preserving the federal exemption. But there are so many more reasons for creating a Family Trust that go beyond it’s tax planning capabilities. How about asset protection, the deceased spouse dispositive provisions, the remarriage of surviving spouse, just to name a few?
Forbes recently ran a brief list of Frequently Asked Questions regarding this “portability” provision. Here are a few of the highlights. Read their article for a complete list).
• Does this provision help me if my spouse died years ago? No. It applies only to deaths after Dec. 31, 2010.
• Does portability apply to lifetime gifts as well as assets that pass through an estate plan? Yes. Under the new law, starting in 2011, the lifetime exemption and the estate tax exemption are expressed as a total amount, and it is possible to use this "unified credit" to transfer assets at either stage or a combination of the two. (From 2004 to 2010, the two amounts were different; the gift tax exemption remained at $1 million, while the estate tax exemption went up.)
• Is portability automatic? No. The executor handling the estate of the spouse who died will need to transfer the unused exemption to the survivor, who can then use it to make lifetime gifts or pass assets through his or her estate. The prerequisite is filing an estate tax return when the first spouse dies, even if no tax is due.
• What happens if you remarry? This is where things may get complicated. The law clearly indicates that if, for example, Sally remarries after Harry's death, she can no longer use Harry's unused exemption amount--only the one of her new husband (call him Joe), assuming she survives him too. If Joe's unused exemption is less than Harry's (or if he has no unused exemption at all), Sally is out of luck.
• Is portability here to stay? Along with all the other estate tax rules in the new law, this provision is set to expire on December 31, 2012.