Estate taxes were big news in 2010 and the beginning of 2011, as Congress passed a two year “patch” that unified the federal estate, gift, and generation-skipping transfer tax, as well as increased the exemption to $5 million for 2011 and 2012. An important aspect of this tax act may be lost on those not familiar with estate planning terms, and wasn’t as widely reported – that of portability.
The new portability rules of the tax act allow spouses to “share” their estate tax exemptions with one another. Portability allows a deceased spouse’s estate to transfer the remaining unused exemption to the surviving spouse. Considering much of their estate may be passed to the surviving spouse with the unlimited marital exemption, this could be quite significant. The surviving spouse can then add the transferred exemption amount to his or her own exemption, which will increase the amount that can be transferred, federal estate tax free, to beneficiaries upon their passing.
For example: John passes away in August of 2011 and leaves a $1 million taxable estate to his children. The remaining $4 million of his exemption is transferred to his wife, Mary. Mary passes away in 2012, her exemption is now $9 million (her $5 million + John’s remaining $4 million). However, portability is not automatic; there are special filing requirments at each spouse’s death to preserve portability.
Sounds like there is no worry for estate taxes for most people with $10 million exempted? Unfortunately, that is not the case, as under current legislation, this portability option only works for couples who both pass away between 2011 and the end of 2012. We are still unsure of what 2013 will bring in the way of estate taxes and portability.
Don’t allow the portability of the current estate tax laws to be your excuse for putting off estate planning. There is certainly more to it than simply planning to avoid estate taxes, and an estate planning attorney can work with you to put together a comprehensive plan that eases the burden of your passing on your loved ones.