The last major piece of federal tax legislation was the American Tax Relief Act (ATRA). It was signed by President Obama on January 1st of this year and was passed in order to avert to so-called fiscal cliff (we went over that cliff a few months later anyway). The tax rules made permanent in ATRA have significant effects on estate planning. One such issue relates to the concept of “portability.” A recent Forbes article provides a helpful primer of some of basic portability concepts.
The first question: what is portability?
Essentially, the principle of portability applies to the estate tax exclusion amounts between couples. Right now an individual has $5.25 million that is excluded from estate taxes. That means, as a couple, two individual have $10,5 million in exclusion available. But what often happens is that one spouse dies first and transfers most (perhaps all) of their assets to the surviving spouse. Transfers to a spouse are entirely exempt, and so there is no estate tax burden.
However, what happens when the second spouse dies? Generally that spouse would only be able to have $5.25 million of the estate exemption. If the estate is worth more than that, then there would be an tax obligation.
Portability changes that by allowing the surviving spouse to use the unused portion of the first spouse’s exclusion amount. This is often referred to as DSUE amount – “deceased spousal unused exclusion” amount. In other words, this allows the estate of the second spouse to exempt millions more from their estate tax burdens. In practical terms, because of portability, adult children and other heirs often receive a much larger tax-free inheritance when their only surviving parent dies.
The basic idea behind this option is logical. Because married couples almost always act as a single unit, it does not make sense for the pair to lose their own exempt amount merely because they likely will not die at the same time.
Importantly, taking advantage of portability does not happen automatically. One must explicitly elect to take it. There are timing and paperwork requirements to take advantage. Considering the significant resources at stake, it is obviously very important not to go it alone. Having professional support is essential to take full advantage of the legal tax savings tools available to you.
For help in New York, contact the estate planning attorneys at our firm today.