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Will Portability of the Estate Tax Exemption Change Estate Planning?

| Apr 7, 2011 | 2010 Tax Act

As noted in previous blogs, the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010 brought about significant changes to the federal estate tax rules. One of these changes involves the concept of “portability” of the federal estate tax exemption between spouses. Simply put, this means that if the first spouse dies and doesn’t use all of his or her estate tax exemption, then the amount of that exemption the deceased spouse did not use can be transferred to a surviving spouse. As a result, the surviving spouse can use the deceased spouse’s unused exemption amount, plus his or her own exemption when the surviving spouse later dies. Prior to the enactment of the new law, a surviving spouse was unable to use any portion of his or her spouse’s estate tax exemption. In effect, the unused portion of the deceased spouse’s exemption died along with the decedent.

One of the arguments in favor of portability was that it would eliminate the need for some of the more complex estate plans, particularly those that involved a “bypass” or “credit shelter” trust. However, this argument does not take into account some of the significant non-tax benefits that can be achieved by implementing these trusts as part of an estate plan. For example, assets held in a bypass/credit shelter trust will generally be protected from creditors and lawsuits. Additionally, the assets in a bypass/credit shelter trust will be protected from a divorce settlement if the surviving spouse dies and later remarries. Furthermore, for couples on their second or later marriage, the use of a bypass/credit shelter trust can be vital in making sure the wishes of the first spouse to-die are carried out after the surviving spouse passes away. None of these benefits can be achieved if one merely relies on the portability rules as the ultimate solution to his or her estate planning issues.

These issues are further complicated by the fact that a surviving spouse’s ability to use the estate tax exemption of a deceased spouse can be severely limited (or even permanently lost) if the surviving spouse remarries. Additionally, the portability rules, along with all of the other tax provisions included in the new law, are set to expire after 2012. For these and other reasons we have found that, in most cases, the same “tried and true” planning techniques that were used prior to the 2010 law changes have equal benefit today as well.

Please feel free to contact our office if you would like for us to review your estate plan in light of these new law changes.