The Importance of Not Relying too Heavily on Portability

 Posted on February 22, 2014 in Estate Planning Attorney

In 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 into law. As part of this law, significant modifications were made to the rules governing federal estate taxes, gift taxes, and generation skipping transfer taxes. Additionally, the law also introduced the concept of "portability" of the federal estate tax exemption between married couples for the 2011 and 2012 tax years. Additionally, last year, President Obama signed the American Taxpayer Relief Act into law. Under the provisions of that law, portability of the estate tax exemption between married couples was made permanent.

 Defining Portability

Portability is a valuable addition to estate tax laws because it allows a surviving spouse to use any unused federal estate tax exemption of the predeceased spouse. Portability may allow some couples to pass significant wealth without complicated estate tax planning.

 Why You Should Be Careful

The unused part of the exemption inherited by the surviving spouse is called the deceased spousal unused exemption (DSUE) amount. Although portability provides some safety for couples that did plan their estate in the traditional way, portability does have some drawbacks that the traditional type of planning with marital trusts does not.  Here are a few:

• Assets passed on to the surviving spouse can use up more of the tax exemption in the surviving spouse’s estate due to appreciation;
• If a surviving spouse remarries, and the second spouse predeceases, the surviving spouse will lose the unused exemption amount;
• The appreciation in the assets after the death of the first spouse is taxable in the estate of the surviving spouse;
• Federal estate tax returns must be filed for the estate of the first deceased spouse in order to reserve the DSUE amount.

Although portability can provide some streamlining of the estate planning process, every client should meet with an experienced estate planning attorney to discuss the advantages that these new provisions may provide for estate planning. If you have any questions regarding the planning of your estate or the impact that portability may have upon your estate plan, an experienced Illinois estate planning attorney can assist you.