Texas Estate Planning

Estate Planning With Portability

The American Tax Relief Act of 2012 (ATRA) brought a lot to the table in regards to estate planning. One planning topic of interest brought on by ATRA is the permanence of “portability.”

While the concept of “portability” is not entirely new, it is a fairly important tax concept for all married couples.

In fact, a recent Forbes article titled “Estate Tax Portability - New Paradigm For Estate Planning” is a primer of sorts for couples still unfamiliar with the concept now become law. Practically speaking, with the advent of “portability,” most married persons do not need to worry about maximizing the estate/gift tax exemption of each spouse. Formerly, couples had to craft special trusts and other devices to ensure the opportunity to shelter their combined estate/gift tax exemption amount.

Under ATRA the estate/gift tax exemption amount for each spouse is “portable” between spouses. Consequently, not only can the surviving spouse inherit all of the couple’s assets, but can inherit the exemption amount attributed to the deceased spouse. This “portability” benefit is not automatic and what appears simple can become complex.

The surviving spouse is required to file the correct tax forms (i.e. IRS Form 706) to claim the unused estate/gift tax exemption of the deceased spouse. Fail to do the paperwork and you fail to get the benefit of portability.

Reference: Forbes (July 20, 2013) “Estate Tax Portability - New Paradigm For Estate Planning”

Will Time Expire on Portability?

You never really hear about it when Congress is in agreement – it’s not newsworthy (but it should be after the past few years) and doesn’t add up to edgy election year politics – but some neat things come out of those silent agreements. Estate planners may be able to keep stock in “portability,” an estate tax provision that is likely to survive year’s end (or else be resurrected thereafter). We’re still waiting for an official word, but by all accounts “Estate-Tax 'Portability' [is] Likely to Stay” (The Wall Street Journal). As regular readers know, the concept of portability came out of budget deals two years ago and is one more provision set to expire as part of the so-called “fiscal cliff.” Portability allows married partners, who already enjoy special rights to exchange wealth between themselves tax-free at the passing of the first, to pass on their unified estate/gift tax exemptions too. Without portability, a surviving spouse may be required to pay estate taxes on the couple’s combined estate value, if the first spouse to die did not properly apply their exemption. A marital trust was the usual strategy employed to break this vicious predicament. Under current law, though, the exemption is now portable (so long as the estate tax return is filed on the passing of the first to die); so the surviving spouse can apply both exemptions to the final estate. It’s a powerful strategy. Under current law, this means that a surviving spouse can pass a whopping $10.2 million in estate value to their heirs, estate-tax-free. Both this generous estate tax exemption and portability itself are set to expire at the end of the year. Though pundits predict that portability is here to stay, no one can honestly say they know what Congress will do. We shall see. Reference: The Wall Street Journal (November 4, 2012) “Estate-Tax 'Portability' Likely to Stay”

Estate Tax Filing Necessary to Preserve Portability

The IRS recently issued new guidance on an important estate tax issue for married couples regarding the portability of individual estate tax exemption between spouses. Each individual is allowed to exempt a certain amount of asset value from estate taxation at death, currently $5.12 million. Portability is a new concept, introduced in 2012, to make it easier for a surviving spouse to utilize both their own exemption and that of their deceased spouse. Like most IRS regulations, however, there are important dance steps to follow in order to achieve the desired result. An estate tax return must be filed soon after the first spouse’s death, usually within nine months. If you miss this filing, you likely will lose the value of the first spouse’s exemption. This means the surviving spouse could only shelter about $5 million of estate assets from taxation, instead of the approximate $10 million value of the couple’s combined exemptions. You can read more about portability and the various estate tax consequences in a recent Wall Street Journal article, “Avoiding Estate-Tax Traps.” Clearly, preserving both spouses’ estate tax exemptions is an important aspect of any comprehensive estate plan, even if your estate assets are far below the exemption amount. Why? Because we never know what twists and turns our lives may take, and a small estate today could grow through any number of possible circumstances over time. Reference: The Wall Street Journal (August 7, 2012) “Avoiding Estate-Tax Traps”

IRS Extends “Portability” Filing Deadline for Surviving Spouses

It would be a gross understatement to say that 2010 and 2011 were, undoubtedly, tumultuous years in the world of estate law. While we can’t expect anything less from 2012 (that battle simply hasn’t occurred yet and likely will be another end-of-year struggle), the “developments” wrangled in 2010 and 2011 are still making news into 2012.

The recent news: The IRS has extended the deadline for the estate tax “portability” election for some surviving spouses. Apparently, the new laws are still largely unknown to the public.

For the surviving spouses of those who died within the first six months of 2011, so long as the decedent’s estate was valued at less than $5 million, there is now an extension to file for portability. Now, even if the executor of such estate didn’t file the return within the first 9 months, or even file for a 6 month extension within that time, they have all 15 months to file. However, to comply they need to properly file both the extension Form 4768 and the estate tax form itself, Form 706. Effectively, this means that the first 2011 portability elections become due on Monday, April 2, 2012.

“Portability,” as you may be aware, is the new ability for a surviving spouse to pick up and carry along, as it were, the unused estate tax/gift tax exemption of the decedent. For 2011 that meant $5 million, less whatever of that exemption had been used as part of the lifetime gift tax exemption, can be passed along to a spouse who would have a $5 million exemption of their own for a total combined exemption of as much as $10 million.

This is not an automatic ability, however, and so proper and timely filing is essential. It may not seem that important today, especially if $10 million seems like a lot, but it is a simple step to plan for a future you can’t foresee (that’s why you’re planning in the first place, is it not?) and a future where this may make the difference.

Clearly, the IRS wouldn’t be offering such extensions if they felt that portability was properly understood and fully utilized; in fact, it likely means that the new laws are not yet understood and so it’s worth getting the word out.

Reference: Accounting Today (February 17, 2012) “IRS Extends Deadline on Estate Tax Portability Election”