Three years ago each one of us became recipients of a $5 million coupon. That’s how I like to describe the estate tax exemption made permanent by the American Taxpayer Relief Act of 2012. (Adjusted annually for inflation, the 2015 exemption is $5,430,000.)
Beyond this attractive estate tax exemption “coupon,” one of ATRA’s most taxpayer-friendly aspects is a concept referred to as “portability.” A temporary feature under the previous tax act, estate tax exemption portability became a permanent fixture under ATRA. This portability now provides a means for married couples to fully use each spouse’s estate tax exclusion amount without having to worry about technical marital deduction formulas in their estate plans. In essence, your unused exemption “coupon” can be added to your surviving spouse’s.
For the higher income couple, portability can help by offering greater flexibility in the handling of estate tax issues. It’s important to remember, however, that portability does not happen automatically. While federal law allows a surviving spouse to claim their deceased spouse’s unused federal exemption and add it to the surviving spouse’s own exemption (referred to as the DSUE amount, or “Deceased Spouse’s Unused Exemption amount”), the surviving spouse must claim the DSUE amount as an election on a timely-filed federal estate tax return. If no return is filed, then the survivor loses their spouse’s unused estate tax exemption.
Many estate plans have not been updated to take full advantage of the flexibility afforded under ATRA. Traditional methods of estate planning forced a mandatory division of a couple’s property into a bypass trust and a marital trust – an appropriate standard of care under the old law. Not only are those outdated formulas unnecessary for the vast majority of clients, they run the risk of creating cumbersome trusts after a spouse dies and missing out on income tax and capital gains tax planning opportunities for a surviving spouse. Many clients will be far better served with updated estate plans that provide for flexibility in administration and rely on portability to handle any estate tax-oriented issues.
What does it all mean? First, any estate plan done before 2013 should be thoroughly reviewed with an eye toward the impact of ATRA and the flexible planning opportunities portability offers. Additionally, most wills and revocable trusts should be amended or restated to assure that the strategies put into effect by those documents are still consistent with the clients’ desires and the best opportunities afforded under current federal and state laws.
Liberated from the uncertainty under prior law, clients “post-ATRA” are freer now to focus on the more important and meaningful aspects of their planning. For clients of all wealth strata, building the right type of marital deduction and portability strategy into the estate plan is essential. As always, effective planning is early planning.
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