The American Taxpayer Relief Act (ATRA) of 2012 made permanent the federal estate tax exemption amount of $5 million – annually adjusted for inflation ($5.34 million in 2014). The Act also made spousal portability permanent, a provision that permits one spouse to assume any unused estate tax exemption amount at the time of the other spouse’s death. Bear in mind the finer points of spousal portability when creating an estate planning strategy, as detailed below.
- Track and record all gifts made during both spouses’ lifetimes, as these must be reported to the IRS. This is the only way to accurately assess how much the surviving spouse will be able to use from the deceased spouse’s unused lifetime exclusion.
- Portability is not automatic. Once a spouse dies, the surviving spouse must file an estate tax return within nine months after the decedent’s death in order to access the unused exemption (a six-month extension is allowed if applied for by the deadline).
- Spousal portability for anyone who died before 2011 is not available, so no use trying to claim it.
- Even if a surviving spouse is not wealthy, he or she should file an estate tax return. This is because sometime in the future the spouse may assume more wealth, in which case the departed spouse’s exclusion amount the year he or she died would still be available.
- For widowed spouses who are considering getting married again, consider the ramifications of the portability provision. For example, say a woman remarries. If her new husband passes away before her, she may claim only the unused exemption of her most recent spouse. Her previous spouse’s unused amount is no longer available to her. In the reverse scenario, let’s say the woman passes away first. Her new husband may claim not only her unused portion, but also any unused portion from her first spouse that transferred to her upon his death – up to the exemption limit for that year.
- On June 26, 2013, the Supreme Court ruled that if a same-sex couple gets married in one of the 17 states (plus Washington, D.C.) that currently permit same-sex marriages, the federal government recognizes the marriage and no longer defines marriage as only between a man and woman. Therefore, a married same-sex couple who lives in a state that recognizes its marriage can claim the unlimited marital deduction and one spouse can pass an unlimited amount to his or her spouse tax free. As for portability, if one spouse dies without using all of his/her federal estate tax exclusion, the unused portion of the exclusion may be transferred to the surviving spouse – just the same as for opposite-sex married couples.
- Recognize that the portability provision does not address many of the reasons people use trusts in estate planning. These may include to protect assets from creditors, to utilize the generation-skipping transfer tax exemption and to leave assets to children from a previous marriage. While spousal portability makes estate planning a little easier between spouses, they might still benefit from utilizing a trust.
This overview is general in nature and is not intended to replace the advice of tax and investment professionals.