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Estate Tax Portability

In the past, we’ve advised married clients to divide their assets between their revocable trusts in such a way as to “equalize” their estates.  The reason for this was that we could not know who would pass away first and we wanted to be sure that each spouse could maximize his or her individual exemption allowed under the law.  In December 2010, President Obama signed the new tax law to take effect for January 2011 through December 31, 2012, which provided that married couples could elect to combine their individual $5 million exemptions to a $10 million joint exemption for the couple, so that a surviving spouse could apply the predeceased spouse’s unused exemption upon the survivor’s death. 

Patty came to us recently when her husband, Peter, died in January 2011.  In reviewing Peter’s assets, we calculated that the total value was about $1.9 million, well below the current estate tax exemption amount of $5,000,000 for 2011.  Therefore, no estate tax return is required to be filed and no state or federal estate tax is due.  However, when reviewing Patty’s estate plan, we discovered that in addition to her very successful chain of beauty salons, she recently inherited several large plots of land in Canada.  Her current estimated worth is approximately $7 million, $2 million of which would be subject to estate tax when she died.  However, under the new portability provision, by filing an estate tax return for Peter and making the appropriate election on Form 706, Patty can combine her individual estate tax exemption ($5 million) with Peter’s unused portion ($3.1 million), and her estate could receive a total exemption of $8.1 million at the time of her death. 

The catch is that, unless the law is made permanent, this new “portability” of the exemption will expire after two years when the estate tax exemption and rates returns to the 2002 amounts.  So, as the law is written today, in order to reap the benefit of the Form 706 portability election, Patty must also pass away before the end of 2012.   Further, if she remarries, she loses the ability to benefit from Peter’s unused exemption. 

Although it may seem like the expense of preparing and filing the 706 outweighs the likelihood of receiving any benefit, the risks in not making the election could be much more costly.

Linda M. Strohschein


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