Tuesday, August 16, 2011

Portability... New Estate Tax Concept

New tax legislation signed December 17, 2010 created a new concept in estate tax planning for married couples that actually makes sense. The new concept is called “portability” of unused estate tax exemption, and it has never existed before. It has enormous, positive estate planning implications.

Everyone has an estate tax exemption that allows them to pass on a certain amount of property to a non-spouse estate tax free. Bequests to spouses, in any amount, are not taxed. If a married person left everything to the survivor, then upon the second spouses’ death only one estate tax exemption was used. A primary goal in many estate plans was to set up trusts that could, by the use of an irrevocable trust, utilize both spouses’ exemptions. This was often difficult and complicated.

Under the new “portability” law, many wealthy couples can choose the simpler route, leaving everything to the surviving spouse and still enjoy two estate tax exemptions.

Three important rules apply for this “portability” to exist:

1. First, the executor of the first spouse to die must file a timely filed estate tax return to transfer the “deceased spouse’s unused exclusion amount” (DSUEA) to the surviving spouse.
2. Second, remarriage by the surviving spouse may cut off this “portability” right. (That is beyond this post.)
3. Third, and most importantly, we simply do not know how long this “portability” law will stay on the books, as this new (2010) law was passed to last for two years only. In 2013, the estate tax laws revert back to the 2001 $1,000,000 estate tax exemption “pre-Bush Tax Cuts.”

Many in Congress want to reduce the estate tax exemption from $5.0 million to $3.5 million dollars, but retain the new “portability” concept. Only time will tell what the estate tax laws will be after 2012. It is prudent for married couples to review their estate plans, wills, and trusts to ensure that the proper clauses exist as to the death of the first spouse to die. Each case is different. For many couples, there may be compelling reasons to utilize an irrevocable trust upon the death of the first spouse.