What is Portability in Estate Planning?

There were a lot of tax law changes (as well as a lot of things that were kept the exact same) when President Obama signed into law the Unemployment Insurance Reauthorization and Job Creation of Act of 2011, but there was one change that simply put, shocked me.  It was the brand new idea that your Credit Shelter Amount was Portable.

How is the Federal Estate Tax Calculated?

It was over two years ago that I penned a back of napkin explanation of how to calculate your federal estate taxes.  While the numbers we are going to use have changed and I have thrown portability into the mix the idea is still the same:

• Assets Owned (Gross Estate)
  • -Marital Deduction
  • -Credit Shelter Amount
  • -Charitable Deduction
• = Taxable Estate
  • Multiple 35%
• =Taxes owned

Credit Shelter Amount – A/K/A The Exclusion Amount

The Credit Shelter Amount is the focus of the post today.  The Credit Shelter Amount, also known as The Exclusion Amount, is what one is allowed to pass to a non-spouse without incurring estate taxes.  The reason I say non-spouse is because the amount you can leave to a spouse is unlimited.  In the mid-90’s the amount was around $600,000…every dollar after that (ignoring charitable and marital deduction) was taxed about 55%.

As part of the Bush Tax Cuts increased that amount from $1,000,000 all the way up to $3,500,000 is 2009 and then unlimited in 2010.  It was set to revert back to $1,000,000 in 2011 when Obama signed into the tax law in late December.

The amount that could be left was $5,000,000 per person.  While the number was higher than what most estate planners thought was going to be implemented, it wasn’t outrageous. It basically meant that with the right kind of will (i.e. a tax sensitive will and not a simple will) a married couple could leave $10,000,000 with no federal estate taxes.  After, $10,000,000 instead of being taxed at 55% the tax was then lowered to 35%.  But in order to receive all these benefits they had to plan.

However, that’s not what happened.  Within the law was a brand new idea it basically said that even if proper planning wasn’t done we are still going to hook up the super uber wealthy!  With Portability.

What is Portability?

Portability allows a surviving spouse to utilize a previously deceased spouse’s (spouse has to die after 2011) Credit Shelter Amount without having to implement a proper tax sensitive estate plan.  The executor of a deceased spouse’s estate may transfer any unused estate exemption to the surviving spouse unused Exclusion Amount is the lesser of the basic Exclusion amount OR the basic exclusion amount of the surviving spouse’s last deceased spouse over the amount of the deceased spouse’s taxable estate (i.e. remaining amount).

The executor of the first spouse’s estate must file an estate tax return on a timely basis and make the election.  So even if a small first estate – may now have to file an estate tax return.  Obviously will incur legal fees to do so and only the most recent deceased spouse’s unused exemption may be used.

So if Husband leaves everything to Wife and then Wife dies with $9,000,000 she wouldn’t have any federal estate tax due since she could use her $5,000,000 and part of her husband’s $5,000,000.  Shocking to those that work in the estate planning world.