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Bar News - February 17, 2012 Tax Law: Portability of the Gift and Estate Tax Exemption By: Christine S. Anderson A limited amount of a person’s wealth can be transferred to his or her loved-ones free from gift and estate tax. Currently, the amount exempt from gift and estate tax is $5,120,000 for each transferor. This exemption will drop to $1,000,000 on January 1, 2013, unless Congress acts to extend the $5,120,000 exemption. Historically, the gift and estate tax exemption had to be used by transfers occurring either during lifetime or at death. "Use it or lose it" was the rule. For example, if a wife died in 2009 and left her entire estate to her U.S. citizen spouse, there would be no estate tax upon her death, because of the unlimited marital deduction for transfers to a U.S. citizen spouse. When the spouse later dies, he will only have one estate tax exemption to shelter his estate from tax. The wife in this example wasted her estate tax exemption by leaving her entire estate to her husband. When Congress passed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010(the "2010 Tax Act") the use it or lose it rule with respect to the gift and estate tax exemption changed dramatically. The concept of portability of a person’s unused estate and gift tax exemption became law. The 2010 Tax Act provides that a person now can use the estate and gift tax exemption not used by his or her deceased spouse,in addition to his or her own exemption. So what does this mean to our clients? If the portability provisions of the 2010 Tax Act become permanent, many of the hoops that our clients jump through to minimize gift and estate tax will no longer be necessary. This can best be illustrated by example. Consider a married couple in their late 80’s. The wife had been a financially successful stock broker who accumulated $6,000,000 over her career. The husband, a talented musician and now retired teacher, has a more modest net worth of $1,000,000. The couple meets with an estate planning attorney because the husband has been diagnosed with a life threatening illness and he is not expected to live more than a couple of months. Traditionally, the estate planning attorney would have advised this couple to establish separate revocable trusts and make sure that the husband has assets in his revocable trust with a value up to his gift and estate tax exemption. The revocable trusts would be designed to hold the first-to-die spouse’s assets in trust for the benefit of the surviving spouse and children in a manner designed to limit the surviving spouse’s control over the assets so that the assets would not be included in the surviving spouse’s taxable estate at the time of the second death. The revocable trusts would have to be drafted and signed, assets transferred from the healthy spouse’s name into the trust of the spouse more likely to die first. All of this process consumed valuable time during the husband’s last weeks of life, adding stress at a most inopportune time. By comparison, if the portability provisions are applicable, the estate plan could be designed to minimize probate and gift and estate taxes, but the scrambling to re-title assets would not be necessary. If the first spouse to die does not use his estate tax exemption, it can be allocated to the surviving spouse on an estate tax return filed after the first spouse’s death. If, in the example, the husband dies in 2012,and leaves $1,000,000 in trust for his children, his remaining $4,120,000 can be allocated to his surviving spouse to be used by her to shelter either lifetime gifts or transfers at death. Unless Congress extends theportability provisions beyond December 31, 2012, they will expire. It is widely anticipated that, regardless of whether the gift and estate tax exemption drops to $1,000,000, remains at $5,120,000 or is some other amount, the portability provisions will be extended after 2012. This would be good news for our clients.
Christine S. Anderson is President of Ansell & Anderson, a law firm in Bedford where she practices trust and estate law. |
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