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.<\/p>\n
The concept is called “portability” of unused estate tax exemption, and it has never existed before. It has enormous, positive estate planning implications.<\/p>\n
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\u00a0to $5,000,000 for 2010- 2012 to uncertainty for deaths after 2012.)<\/p>\n
For example, under old law, if a spouse died\u00a0 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.<\/p>\n
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.<\/p>\n
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!<\/p>\n
Three important rules apply for this “portability” to exist:<\/p>\n
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<\/a> .) Sadly, only time will tell what the estate tax laws will be after 2012.<\/p>\n For a review of the evolution of the estate tax exemption, see below.<\/p>\n 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\u00a0may be\u00a0compelling tax or “control” reasons to keep an irrevocable trust at the first spouse’s death.<\/p>\n