When a spouse dies, the surviving spouse can be left puzzling over how best to handle their loved one's estate. One issue that presents itself is what to do with the deceased spouses estate tax exemption. This issue used to be handled through creating a credit shelter trust; however, The American Taxpayer Relief Act of 2012 introduced a new course of action that has been termed "portability". The law makes it possible for widows/widowers to carry over any unused amount of their deceased spouse's estate tax exemption and add it to their own. The 2012 Act places the exemption amount for an individual at $5 million, subject to inflation, which in 2014 came to $5.34 million.
To demonstrate let's use the example of John and Nancy, a married couple. They both have $5 million dollar estates and neither has used their estate tax exemption to make shelter lifetime taxable gifts. When Nancy dies, she leaves John her entire estate (which is subject to the unlimited estate tax marital exemption) and so her estate tax exemption remains unused. With portability, Nancy's whole estate tax exemption amount will now transfer to John for his use. To take advantage of this, John must makes an affirmative election by filing an estate tax return (IRS Service Form 706) nine months after Nancy's death. This means that John will have Nancy's unused exemption as well as his own (around $10 million) to use to distribute tax free gifts during his lifetime or as part of his own estate when he dies.
Portability can, in some instances, simplify couples' estate planning and keep an unused estate tax exemption amount from going to waste. However, in situations regarding remarriage and multi-generation trust planning, setting up credit shelter trusts might still be the best option. To discuss whether portability is the right tool to use in your estate planning, give us a call. Callahan Witherington PLLC, 615-712-8669.