In recent past, the waters of estate and gift taxes have been made murky by legislative uncertainty. Thankfully, the American Taxpayer Relief Act of 2012 (ATRA) served to bring some clarity and permanence to the estate planning landscape. This provides an ideal opportunity for families to revisit their estate plans.

The ATRA made permanent changes to the federal transfer tax system, exemption rates are currently 5.34 million (10.68 if married) and a top tax rate of 40%. ATRA also made permanent the popular portability provision, at which we’ll take a closer look.

How Does Portability Work?

In simplest terms, portability allows the first spouse to die to transfer his or her unused estate tax exclusion amount to the surviving spouse, who can then use it for their gift or estate tax purposes. Now that we’ve defined portability, let’s look at how it works.

Under portability, a surviving spouse can use the deceased spousal unused exemption amount to make lifetime gifts or to shelter bequests at death. This provides an alternative to the traditional estate planning for wealthy married couples in which a credit shelter trust, or a bypass trust is set up to utilize the deceased’s unused exemptions. This effectively gives the surviving spouse full control of the unused exemption amount, including who gets the benefit of the exemption amount.

Details to Consider

There are a few limitations to portability that impact your overall estate plan, and should be considered.

  • Portability does not impact state taxes ~ There are 19 states that impose an estate/inheritance tax. These taxes are separate from federal taxes, hence portability doesn’t effect them.
  • Portability does not control bequests ~ While portability allows a married to leave 10.68 million to their heirs without incurring federal estate taxes, couples should still include traditional strategies to control how and when their heirs receive the assets.
  • Portability does not cover asset appreciation ~​ Any appreciation on a deceased spouses assets are added to the estate of the surviving spouse. If this  amount exceeds the surviving spouses estate exculsions, tax will be due on the difference.
  • Generation skipping transfer is not portable ~ Portability doesn’t apply to GST exemptions, any unused portion will not transfer to a surviving spouse.

The Importance of Balance

Though recent legislation has brought stability to estate planning, it’s done little to lessen the complexity. While portability is a popular provision, it is best utilized within a diverse and flexible estate plan. Whether you choose to partner with us or another professional estate planner, we strongly recommend seeking guidance to balance portability with traditional strategies to best protect your estate.