Monthly Archives: July 2011

New, portability of unused estate tax exemption for married couples offers simple “2 for 1” plans.

Thanx to the December 16, 2010 federal tax legislation, married couples now get a simple, non-trust “two for one” estate tax exemption, doubling up the amount that a surviving spouse can leave without estate tax.

The concept is called “portability” of unused estate tax exemption, and it has never existed before. It has enormous, positive estate planning implications.

Prior to this year, if a married person left the estate outright (i.e. simply) to the surviving spouse, the estate tax free amount of the first spouse was lost forever. Each person has an estate tax exemption that protects a certain amount from estate tax. But, under old law, if a married person left everything “no strings attached” to the survivor, then the children of the surviving spouse only inherits the surviving parent’s estate tax exemption. (As shown at the end of this post, the estate tax exemption evolved from $600,000 in 1997 to $1,000,000 when the so-called Bush Tax Cuts began to $3,500,000 in 2009 climbing to $5,000,000 for 2010- 2012 to uncertainty for deaths after 2012.)

For example, under old law, if a spouse died  and left everything outright to the survivor and then the survivor died and left everything to their children, estate tax approaching 50% could be due on the taxable estate exceeding the following amounts for the following year of death: $600,000 in 1997 to $1,000,000 when the so-called Bush Tax Cuts began climbing to $3,500,000 in 2009.

So, under the old law, in order for married couples to shelter estate tax on that part of their combined estates in excess of one estate tax exemption, couples had to utilize a range of elaborate estate planning devices such a “Bypass” or “Exemption” or “A-B” or “Credit Shelter” or “Disclaimer” trusts that required creation and funding of an irrevocable trust at the first spouse’s death. Not simple. Complicated.

In stark contrast, under the new “portability” law, couples can choose the simpler, cheaper “I love you” plan, leaving everything no strings attached to the surviving spouse and enjoy two estate tax exemptions. For example, if a surviving spouse inherited everything this year, then that surviving spouse could die next year with a $10,000,000 (not $5M) estate tax exemption!

Three important rules apply for this “portability” to exist:

  1. First, the executor of the first spouse to die must file a timely filed estate tax return to transfer the “deceased spouse’s unused exclusion amount” (DSUEA) to the surviving spouse.
  2. Second, remarriage by the surviving spouse may cut off this “portability” right. (That is beyond this post.)
  3. Third, and most importantly, we simply do not know how long this “portability” law will stay on the books, as this new (2010) law was passed to last for two years only. In 2013, the estate tax laws revert back to the 2001 $1,000,000 estate tax exemption “pre-Bush Tax Cuts.”

President Obama’s position has been a $3,500,000 estate tax exemption starting 2013, but with the new “portability” concept remaining. (See prior post and www.treas.gov/resource-center/tax-policy .) Sadly, only time will tell what the estate tax laws will be after 2012.

For a review of the evolution of the estate tax exemption, see below.

In light of these estate tax changes, it is wise for married couples to review their estate plans, wills, and trusts to ensure that the proper clauses exist as to the death of the first spouse to die. Each case is different. For many couples, there may be compelling tax or “control” reasons to keep an irrevocable trust at the first spouse’s death.

            2010                 2011                 2012              2013
 Estate Tax
 Exemption amount *  $5.0 million  $5.0 million  $5.0 million (indexed for inflation)  $1.0 million
 Tax rate  Flat (35%)  Flat (35%)  Flat (35%)  Progressive (up to 55%)
 Elections  Can elect out of estate tax, but §1022 carryover basis will apply ($1.3 million  “free-basis” + $3.0 million spousal bonus)  Can elect to add “deceased spousal unused exclusion amount” (basically, the unused exemption from the estate of the decedent’s last deceased spouse or the exemption amount in effect at the decedent’s death, whichever is less) to the exemption amount  Can elect to add “deceased spousal unused exclusion amount” (basically, the unused exemption from the estate of the decedent’s last deceased spouse or the exemption amount in effect at the decedent’s death, whichever is less) to the exemption amount  NoneNote that these estate tax laws may become political at the 2012 Presidential election, depending on the deficit and economy.
 Gift Tax
 Exemption amount  $1.0 million  $5.0 million (plus, if elected, the “deceased spousal unused exclusion amount”)  $5.0 million (indexed for inflation) (plus, if elected, the “deceased spousal unused exclusion amount”)  $1.0 million
 Tax rate  Flat (35%)  Flat (35%)  Flat (35%)  Progressive (up to 55%)
 Generation-Skipping Transfer Tax           
 Exemption amount  $5.0 million  $5.0 million  $5.0 million (indexed for inflation)  $1.0 million (indexed from 1997)
 Tax rate  Zero  Flat (35%)  Flat (35%)  Progressive (up to 55%)

*  Note the evolution of estate tax exemption amounts: $600,000 in 1997; $625,000 in 1998; $650,000 in 1999; $675,000 in 2000-2001; $1,000,000 in 2002-2003; $1,500,000 in 2004-2005; $2,000,000 in 2006-2008; $3,500,000 in 2009.               

copyright James J. Phillips 2011

Index of past posts:

Property tax increase looms as a big concern for many California inheritance and gift plans, June 10, 2011

Randal Dutra lecture on October 8, 2011 June 7, 2011

How to keep away the in-law from your child’s inheritance. How to preserve the separate property character of an inheritance. May 29, 2011

How much can trustees be paid? What is reasonable trustee compensation? May 18, 2011

Medi-Cal Payment of Long Term Care in California May 13, 2011

Ingredients for trust planning May 10, 2011

Will there be estate tax due when I die? May 10, 2011

Avoid Conservatorship of Your Person: Protect Your Health Care Decision With An Advance Health Care Directive April 15, 21011

Avoid Losses and Protect Yourself from Lawsuits: Review All Your Insurance Coverage Annually April 8, 2011

Who would raise your minor child? Selecting a guardian of your minor child’s person. April 2, 2011

New, extended deadline for increase in basis for property acquired from a person who died in 2010 April 1, 2011

Top 10: Do You Need to Update Your Trust or Will? March 25, 2011

How to Choose a Nursing Home March 18, 2011

NEW Estate Tax, Gift Tax, and Generation Skipping Transfer Tax Laws March 18, 2011

Selecting A Trustee for Your Living Trust March 18, 2011

President Obama’s February 2011 Assumption for 2013 estate tax exemption March 18, 2011