Purpose:
To minimize or eliminate federal estate taxes for a married couple.
How does it work?
Current federal law
gives each taxpayer a $5.12 million exclusion
from the federal estate tax. If someone dies
and their total estate, including gifts made during their lifetime, does not
exceed $5.12 million, their estate does not owe federal estate taxes.
In the past, however, if the first
spouse to die gave all of his or her estate to the surviving spouse, the
exclusion for the first spouse to die was lost. Married couples used
A-B trusts, also called bypass trusts or exemption trusts, to avoid losing
the exclusion. For more information about this subject, see
A-B Trusts.
Portability allows the surviving
spouse to use the exclusion that the first spouse to die did not use.
If the first spouse to die gave all of his or her estate to the surviving
spouse, the surviving spouse will wind up with a maximum $10 million exclusion.
What are the problems with
portability? The surviving spouse must elect to use portability
by filing an estate tax return for the estate of the first spouse to die.
The estate tax return must include the election for portability, which is
probably accomplished by simply checking a box. However, failing to
file the return will cancel portability for the first spouse to
die. Estate tax returns are complicated and CPAs will charge thousands
of dollars to prepare them.
Another problem is that portability applies only to
estates of those who died after Jan. 1, 2011. Estates of decedents who
died before that date are subject to the old law, which doesn't allow
portability.
Remember that this is also part of a two-year tax
bill, which expires on Dec. 31, 2012. If Congress fails to extend the
tax bill, portability will be history. And even if there was an estate
tax return filed for the first death in either 2011 or 2012, and portability
was elected, there won't be any portability if Congress does not extend the
current estate tax laws.
Also, portability does not apply to generation
skipping transfers.
What are the benefits of
portability? The most obvious benefit is $10 million worth of
estate tax exclusion, which is about three times higher than the previous
high of $3.5 million in 2009. The amount is so high that many
decedents could make substantial gifts or bequests, and still leave a high
amount of portability to the surviving spouse.
For example, assume that Husband dies in 2011, leaving
an estate of $2 million, which he gives to his children from his first
marriage. His widow files an estate tax return for his estate, elects
portability, and gains an additional $3 million exemption for her own
estate. Her total portability will be $8 million in this example.
