Saturday, March 12, 2011

Estate Tax Portability planning for married couples

For the years 2011 and 2012, the 2010 Tax Relief Act (full title is the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010") (“TRA 2010") allows a deceased spouse's unused $5,000,000 lifetime exemption to be shifted to the surviving spouse.

Section 2010(c)(2) of the I.R.C. now provides that for estates of decedents dying in 2011 and 2012, the applicable exclusion amount is the sum of (1) the “basic exclusion amount” and (2) in the case of a surviving spouse, the “deceased spousal unused exclusion amount.”

Per Sec. 2010 (c)(3) and (4), the deceased spouse’s exclusion is defined as $5,000,000 of the last deceased spouse dying after 2010 and is inflation adjusted after 2011.  This amount is added to the $5,000,000 exclusion available to the surviving spouse.  An irrevocable election must be made on the estate tax return of the first spouse to die to obtain this exclusion.

Because the exclusion may only be taken for the “last deceased spouse” a decision to remarry may have drastic tax consequences.

Theoretically, this portability is designed to obviate the need for proper estate planning using traditional trusts to take advantage of the exclusion for each spouse to minimize overall estate taxes.  However, portability sunsets in 2013 and beyond and therefore cannot be relied upon. Married taxpayers with sizeable estates still need to maximize the amount of the exclusion used in the estate of the first to die and provide an exclusion in the estate of the second to die by making the value of property owned by each spouse roughly equal and having wills with credit shelter trusts built in to the wills.

And for those taxpayers who feel that portability will not in fact sunset (the President’s budget proposal calls for extending portability, there are still strong reasons for each spouse to plan to use as much of the applicable exclusion as possible. This is because using credit shelter planning not only exempts the amount in the trust from estate tax, but any increase in that value after the death of the first spouse to die will likewise not be included in the estate of the survivor. Portability option does not shield the growth on the $5,000,000 from estate tax.

Another advantage of the traditional credit shelter trust is asset protection planning from creditors or spendthrift spouses or the surviving spouses new beau or spouse.

Filing a return claiming portability keeps the statute of limitations open so if the first spouse’s estate contains a business or other difficult to value assets, the open limitation period rule may militate against making the election.

Final consideration is that the generation skipping tax (“GST”) exemption is not portable.

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