Portability of Estate Tax Exemptions


Volume 1 • Issue 8 • December 2011

The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. This month's issue will discuss Portability. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.

In December 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Tax Act"). One of the much anticipated changes to come from the 2010 Tax Act is the authorization of what has become known as “Portability” of the estate tax exemption. Portability allows any unused portion of the estate tax exemption to be transferred to the surviving spouse. Using the current $5 million exemption amount, a surviving spouse could potentially end up with a $10 million exemption. Historically, “Portability” could only be accomplished through the use of proper trust based planning.

According to the 2010 Tax Act, the Personal Representative (sometimes referred to as an Executor) of the deceased spouse’s estate may transfer any unused estate tax exemption to the surviving spouse. To effectively transfer the exemption, the Personal Representative must make a proper election on a timely filed Estate Tax Return. For example, Jack and Jill are married. Jack dies in 2011 and leaves his entire $3 million estate to Jill, using $3 million of Jack’s $5 million exemption. Jack’s executor elects to permit Jill to use Jack's unused exemption amount. Jill now has an exemption amount of $7 million (her $5 million exemption amount plus $2 million from her deceased husband, Jack).

Only the most recent deceased spouse's unused exemption may be used by the surviving spouse, so a remarriage jeopardizes the original unused exemption and any unused exemption amount not used by December 31, 2012, will be lost.

After Jack died, Jill married Jerry. Jerry died in 2012, and left his entire $4 million estate to his children. The $2 million Jill previously received from Jack is wiped out by Jerry's subsequent death. If Jerry's Personal Representative makes the timely election to permit Jill to use Jerry's unused exemption, her exemption amount is $6 million ($1 million less than she had prior to Jerry dying). If Jerry's executor does not make such an election, Jill's exemption amount is just her own $5 million ($2 million less than she had prior to Jerry dying).

Despite the apparent simplicity of leaving everything to the surviving spouse and relying on portability, there are strong reasons to continue to use credit shelter trust planning. These include:

  • The credit shelter trust provides asset protection for the surviving spouse;

  • The deceased spouse's unused exclusion amount is not indexed for inflation;

  • The deceased spouse's unused exemption will be lost if the surviving spouse remarries and survives his/her next spouse;

  • Appreciation of assets left to the surviving spouse are included in the surviving spouse's gross estate whereas appreciation of assets in the credit shelter trust is not;

  • There is no portability of the deceased spouse's unused Generation Skipping Tax exemption;

  • The credit shelter trust allows the deceased spouse to make sure that the assets in that trust are managed and distributed according to his/her wishes and not those of the surviving spouse;

  • The cost of filing an estate tax return can be significant;

  • The current law requires that both spouses must die in 2011 or 2012; and

  • Unless extended by Congress, “Portability” will expire at the end of 2012.

While Portability is a welcome change, it is not currently a reliable or effective method of planning. We continue to recommend to our Clients the tax and other benefits of proper trust based planning.  We expect to see plenty of debate in the coming year regarding Portability and other provisions of the 2010 Tax Act that will expire at the conclusion of 2012.

This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.