In 2014, we heard a lot about portability, which surprisingly, wasn’t coming from the IRS. One reason it was the tax topic of choice was the deceased spousal unused exclusion amount – which kicked in on New Year’s Day and is is applicable back to 2011. What that meant, simply, was that a surviving spouse could use any portion of his or her deceased spouse’s unused $5.34 million gift tax exclusion (that figure is now $5.43 million).
In other words, couples may transfer up to $10.86 million tax free.
For clarity, we’ll continue to refer to it as portability for the sake of this paper. Also, as mentioned, that figure was $5.34 million at that time, but it’s now $5.43 million, which is the number we will use – also for clarity.
The one thing that remains the same is that you may give your spouse an unlimited amount of money tax free. It’s known as the unlimited marital deduction. Before portability became part of the law, when a second spouse died, anything above the exempt amount not going to charity would be taxed. In other words, the first spouse’s exemption would be lost. Many of our clients opted for bypass trusts, or as they’re sometimes referred to, family trusts. This took care of that problem.
While a bypass trust is still good for a number of estate planning reasons, portability eliminated that need since it’s unnecessary to use the trusts just to preserve their federal exemptions. Also, remember that the retro period only goes back to deaths after December 31, 2010.
Bypass trusts are still a good choice since they are not taxed at the time of the death of the first spouse. When the surviving spouse passes away, they are not considered part of his or her estate either, so they’re not subject to those taxes either.
Portability applies to both lifetime gifts as well as assets that pass through an estate, up to $5.43 million. If the amounts rise above that dollar figure, there could be a whopping 40 percent tax bill that awaits your survivors. Your estate planning attorney will be able to provide guidance on these important issues. Also, and this is important, you have to report this to the IRS. If you use $3 million this year for lifetime gifts, you have to remember that in the coming years since it’s a running tally, versus a “start over” period every new year. This applies to same sex couples provided they’re married. It does not apply to any spouse who is not a U.S. citizen – again, a qualified estate planning lawyer is your best friend in these types of situations. Don’t assume portability is automatic, either. The executor of your estate will have to transfer the unused exemption to the surviving spouse.
There are a host of other “what if’s” that you will likely face at some point, such as what happens if the surviving spouse remarries. Because there’s not a straight line answer, it’s impossible to provide a one size fits all answer. If you’d like to learn more about portability and how it fits into your estate plan, contact Zimmer Law Firm today.