Have a Very Portable New Year

Whew!  I don’t know about you but I am glad that Fiscal Cliff stuff is over — well, at least the automatic tax increase part of it. Among other issues covered in the American Taxpayer Relief Act of 2012, Congress finally resolved the uncertainty in the federal estate and gift tax law that has been plaguing us since 2009.  Starting in 2010, there was no estate tax, then there was a tax but only on assets above $5 million, then there was the possibility that a 55% tax would apply in 2013 to assets above $1 million…how could we possibly plan in that climate?

Well the uncertainty is gone and we are all in a much better place.  I won’t go into all the details of the Tax Act, because you will be bombarded with numerous summaries of the new Act.  But we now know that the federal estate and gift tax will only apply to assets over $5 million (actually $5.25 million as adjusted for inflation in 2013) at a maximum rate of 40%. For families with less than $5 million, the planning becomes much easier and certain.  I would still recommend that, if you are in this category, you create trusts in your Will for your beneficiaries – not for tax reasons, but to protect your beneficiaries from claims of creditors, matrimonial claims, or to protect a beneficiary who can’t make wise financial decisions.  As I have mentioned before, there are many different types of trusts and a full discussion of those is not the point of this post.

The Tax Act also made permanent the concept of “Portability” – the ability of a surviving spouse to “use” the unused share of the $5 million exemption of his or her deceased spouse.  Remember, you can leave any amount to a spouse (transfers to a spouse are exempt from estate or gift tax) and can devise assets (including lifetime gifts) worth up to $5 million to all others without paying any estate tax.  But what if the first spouse to die does not use all of his exemption? With Portability, the surviving spouse can use the unused portion of the deceased spouse’s exemption amount to protect her own assets.  Say the first spouse to die has an estate of $2 million and the surviving spouse has $6 million. Using Portability, even with total family wealth of $8 million, no federal estate tax would be due after the death of both spouses. If the first to die leaves his assets to his spouse, he uses none of his exemption (since transfers to a spouse are gift and estate tax free). His entire unused exemption of $5 million can be carried over (it’s portable – get it?) to the surviving spouse. She can now protect the family wealth of $8 million, and could even protect an additional $2 million, using her own exemption of $5 million plus the $5 million from her deceased husband.

There are many regulations and limitations, but that is the concept of Portability. It was first introduced on a temporary basis for 2011 and 2012, but no one knew what was supposed to happen to it after 2012.  So it was not very valuable – to be effective, both spouses would have to die no later than 2012.  But now it is permanent. It will be especially helpful for families where one spouse has more assets than the other if ownership cannot be equalized easily.  For instance, suppose one spouse has the bulk of her assets tied up in an IRA. It is impossible to transfer ownership of assets tied up in retirement accounts between spouses, so Portability can help eliminate estate tax in this situation.

There will be many uses for the concept of Portability.  While it will not replace a well thought out estate plan, Portability will be another tool for an estate planner to consider in helping you in the future.


Questions regarding this article may be sent to Publications@Capehart.com.


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