Over the last two years, four sets of estate tax rules have been in effect, with the individual exemption ranging from $2 million (2008) to $3.5 million (2009) to unlimited (2010) to $ 5 million (2011). Besides these varying exemption levels, another major change in the new estate rules includes the “portability” factor.
Portability allows each partner of a married couple to use the rest of the other’s estate-tax exemption. It facilitates planning when one spouse has a relatively large, indivisible asset.
The Tax Relief Act of 2010, Title III provision illustrates how portability works:
Assume that Husband 1 dies in 2011, having made taxable transfers of $3 million and having no taxable estate. An election is made on Husband 1’s estate tax return to permit Wife to use Husband 1’s deceased spouse unused exclusion amount. Wife has made no taxable gifts. Thereafter, Wife’s applicable exclusion amount is $7 million (her $ 5 million basic exclusion amount from Husband 1), which she may use for lifetime gifts or for transfers at death.
A New York estate planning attorney should then prepare a federal estate tax return for the wealthy surviving spouse’s deceased husband. At a 35% tax rate, the unused $ 2 million dollar exemption could someday be worth $700K to beneficiaries.
Like the $ 5 million exemption, portability is in effect for two years only – and in order to qualify for the provision, an accountant or attorney must prepare and file the estate tax return calculating the unused portion and elect to pass it on. Potentially the more valuable the unused exemption, the more modest the estate of the deceased spouse.
Because of the complexity of the Title III provision, it will help to have an experienced attorney explain the portability rule and if it makes sense to file the necessary tax forms as part of your comprehensive elder law estate plan.
Written by A.K. Lehmann, ABA Paralegal