Taxation & Estate Planning

25 Things You Need To Know About The New Estate Tax Laws: 16-20

By Joel A. Schoenmeyer

PORTABILITY

Background: I previously spoke about the "exemption amount" for federal estate tax purposes. The worst thing about the exemption amount (at least, for married couples) was that, if you didn't use it, you would lose it. For instance, imagine a married couple at a time when the (per person) exemption amount is $3.5 million. The couple (Frank and Betty Hope) have $7 million is assets, all of which they own jointly. Frank dies, and Betty automatically becomes the owner of all of their assets. When Betty dies, an estate tax is due.

How is that possible? They had total exemption amounts of $7 million and assets of $7 million, didn't they? The problem was that, when Frank died, none of his $3.5 million exemption amount was used. Everything went to Betty estate tax-free, courtesy of the marital deduction. So when Betty died, she had only her $3.5 million exemption amount, with assets ($7 million) far in excess of that amount.

16. The Act introduces the concept of portability. It would allow Betty the benefit of Frank's unused exemption amount when she dies. So, in the above example, there would be no federal estate tax due.

17. The Act only allows portability for decedents dying after December 31, 2010.

18. And, of course, portability ends after December 31, 2012 -- so this is only a two-year deal (for now). (In other words, BOTH spouses have to die within 2011 or 2012.)

19. How does the surviving spouse make sure he or she can get the benefit from the unused exemption amount of the first spouse to die? An estate tax return has to be filed for the first spouse to die, showing the unused exemption amount.

20. That two-year thing mentioned above is really a bummer. Portability -- if it was made permanent -- would change the face of estate planning, and make things MUCH easier for everyone involved. Without portability, we're stuck creating multiple trusts at the death of the first spouse to die, with one trust containing that spouse's exemption amount (so it's not lost) and another trust containing everything else. With portability, we can just leave everything outright to the surviving spouse, although there are some good non-tax reasons NOT to do that. (See this article for more details.)

Full post as published by Death and Taxes Blog on January 18, 2011 (boomark / email).