Estate Tax Exemption “Portability”: Is it right for you?

Estate Tax Exemption “Portability”: Is it right for you? One of the significant changes under the American Taxpayer Relief Act of 2012 (ATRA) enacted in January, was to make estate tax exemption “portability” permanent. What is “portability”? When one spouse dies, portability allows the surviving spouse to use the deceased spouse’s unused exemption amount. This means that if you didn’t get around to doing estate planning, there may be a safety net with portability. This may mean that married couples can now maximize the benefits of their combined exemptions without the need for sophisticated estate planning involving multiple trusts. Portability does simplify estate planning, but should you rely on it? Doing so may be appropriate under certain circumstances. But for many people, particularly the affluent, more-sophisticated strategies continue to offer significant benefits. Life and Planning Before Portability Before portability, the traditional approach for maximizing a couple’s exemption amounts was to employ an “A-B trust”. Generally, the “A” trust is a marital trust and the “B” trust is a credit shelter, or “bypass,” trust. For this strategy to be most effective, spouses should “equalize” their estates by, to the extent necessary, transferring assets from one to the other. When one spouse dies, his or her assets are used to fund the credit shelter trust up to the exemption amount (currently $5.25 million) less any gift tax exemption used during life. This trust benefits the surviving spouse for life and then distributes the remaining assets to the couple’s children or other beneficiaries. The excess, if any, goes into the marital trust, which benefits the surviving spouse and qualifies for the unlimited...

The Estate Tax Exclusion Amount: It is “Permanent” only as long as they say it is!

The Estate Tax Exclusion Amount: It is “Permanent” only as long as they say it is! We were told at the end of December last year that there is a “permanent” fix to the estate tax issue. Of course, for federal tax law purposes, something is “permanent” only so long as Congress and the President say it is. I am talking about the “basic exclusion amount” for federal gift and estate tax purposes. This is the amount that a taxpayer can give away either during life or at death [or both] before any federal gift or estate tax (“transfer tax”) will have to be paid on the transfer. The American Taxpayer Relief Act of 2012 (the “2012 Act”), signed into law by the President on January 2, 2013, made “permanent” the $5 million inflation-adjusted basic exclusion amount, currently $5.25M. The 2012 Actalso made “permanent” a top marginal transfer tax rate of 40%. But what is this?? Less than 100 days after the President signed the 2012 Act into law, his Administration released the“General Explanations of the Administration’s Fiscal Year 2014 Revenue Proposals” ( It appears that the Administration already wants something less “permanent” with respect to the basic exclusion amount and the highest marginal transfer tax rate. The Administration proposes returning to the federal transfer tax law in effect for 2009 for estates of decedents dying, and gifts made after, December 31, 2017. Thus, in just under five years, beginning in 2018, the highest marginal transfer tax rate would increase to 45%, the lifetime gift tax exclusion amount (i.e., the amount a taxpayer can give away during life) would...

The Clock is Ticking: The tax law is set to change

The Clock is Ticking: The tax law is set to change in a radical way and opportunities may cease to exist at midnight on December 31, 2012. History To understand the impending deadline, a little history is in order. Former President George W. Bush signed a number of tax cuts into law in 2001 and 2003. The “Bush Tax Cuts” would have expired on January 1, 2011, but Congress and President Barack Obama, after a contentious debate at the end of2010, extended the Bush Tax Cuts until January 1, 2013. The extensions included a new element, an unexpected increase in the estate tax, gift tax, and generation-skipping transfer tax exemptions to $5 million in 2011 and $5,120,000 in 2012. Effect of Increase Because of this increase, an estate having a net value of $5,120,000 or less is completely exempt from the estate tax (this tax-free result applies to the estate of a decedent who dies in 2012 and who did not make significant lifetime gifts). In addition, the increase in exemption allows individuals (regardless of the size of their estate) to make gifts during their lifetime of up to $5,120,000 before December 31, 2012, without incurring a gift tax. This tax exemption for lifetime gifts is in addition to, and does not include, smaller annual gifts of up to $13,000 or certain direct payments to schools or healthcare providers, excluded under a separate exclusion. Finally, the increased generation-skipping transfer tax exemption permits these gifts to benefit grandchildren and more remote descendants. The increased exemptions apply only until December 31, 2012. Unless Congress and the President take action, the extensions...
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