The American Taxpayer Relief Act (2012 Taxpayer Relief Act) was signed into law on January 2, 2013. The Act in part permanently increased the federal estate tax exemption to $5,000,000.00 to be indexed annually for inflation (which is $5,250,000 for 2013) and established a top tax rate of 40%. As part of the new law, “portability” was also made permanent. The portability aspect of the law did not receive the publicity or attention the other aspects of the law did. Many persons and some professionals are not familiar with portability, which permits the federal estate tax exemption to be “portable” between a husband and wife. Portability is only available to the surviving spouse of the decedent and no other. When one spouse dies, the surviving spouse can preserve the deceased spouse's unused exemption amount for use in the future when the surviving spouse dies. This unused exemption amount is added to the surviving spouse’s own exemption in effect at the time of his or her death. For example, Jim Smith dies in 2013 when the federal estate tax exemption is $5,250,000.00. He leaves a surviving spouse, Mary Smith. Jim’s taxable estate is $3,250,000.00. The $2,000,000.00 unused portion of Jim’s federal estate tax exemption ($5,250,000.00 exemption less $3,250,000.00 taxable estate) is portable to his surviving spouse, Mary, to be used by her in the future. If portability is elected in Jim’s estate and Mary subsequently dies in 2013, her total federal estate tax exemption is $7,250,000.00 ($5,250,000.00 exemption plus Jim’s unused exemption of $2,000,000.00). However, portability must be properly elected by the successor trustee of Jim’s trust or the personal representative of his estate by timely filing a Form 706, United States Estate Tax (And Generation-Skipping Transfer) Tax Return, for Jim’s estate. Mary can also utilize Jim’s unused tax exemption against any tax liability that would otherwise arise from subsequent lifetime gifts made by her. Portability is an important and valuable estate planning tool to be considered when a person dies with a surviving spouse.
Attorney John Mugan
