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Estate Planning and Administration

Federal Estate Tax Exemptions and “Portability”

American Taxpayer Relief Act sets new federal estate tax exemption

The American Taxpayer Relief Act set the new federal estate tax exemption at $5.25 million per decedent, or $10.5 million for a married couple.  In addition, the new “Portability” provisions allow the estate of a deceased spouse who doesn’t use all of his $5.25 exemption to pass his excess exemption on to his surviving spouse.  For example, if the first spouse dies in 2013 without using $2 million of his exemption, that leftover $2 million tax exemption can pass to his surviving spouse, giving the survivor a total of $7.25 million of estate tax exemptions to use at her death.

However, in order to utilize this new “Portability” benefit, a Form 706 Federal Estate Tax Return has to be filed in the first spouse’s estate regardless of whether the first spouse owes any federal estate tax.  Many “survivor’s” estates are going to miss this opportunity by not filing the return in the estate of the first spouse.

How does this affect you?

On the surface, these increased exemptions appear to make estate planning simpler for most people.  Why not just leave it all to your spouse?  Why get more complicated than that?  Because important non-tax reasons may exist for a more detailed approach.

For example, if the surviving spouse remarries, the deceased spouse’s estate planning may be frustrated or take an entirely different direction.  Perhaps each spouse should do everything he or she can do now to insure that each estate will benefit all of the people that the spouse has chosen, not just one person.

Further, consider the case of a husband who has children of a prior marriage.  Leaving all of his estate to his second wife may not offer any protection for the children of the first marriage.  A better approach in that situation could be to use a “spendthrift” trust to give the income to the surviving spouse for her lifetime, while preserving the principal for the children.

Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.