The Investment Scientist

Portability of a Married Couple’s Estate

Posted on: June 29, 2012

[Guest Post by Christopher Guest] On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, or TRUIRJCA, but I will call it the “tax compromise.” The tax compromise impacted federal estate taxes in a number of ways. One of the more surprising changes was including “portability” of a married couple’s federal estate tax exemption between the married couple. I say “surprising” because all the other changes to estate taxes were some version of current estate tax procedures while “portability” was brand new.

Portability for federal estate tax purposes means that a surviving spouse can take advantage of the unused exclusion amount of his or her predeceased spouse by adding the unused exclusion amount of the first to die spouse to the exclusion amount of the surviving spouse. For example, if Husband A dies using up only $2.5 million of their federal estate tax exemption, then Wife B has a $7.5 million exemption on the remaining assets – Wife B’s $5.0 million exemption plus the remaining $2.5 million exemption from Husband A. This means a married couple can have $10 million in assets exempted from the federal estate tax.

There are a couple of caveats:

  1. A “timely and complete” estate tax return must be filed with an election with the IRS to “preserve” portability. That means the estate must file a Form 706 when the first spouse dies, even if there is no federal estate tax due (see more on this below). Even if the executor of the estate of the first spouse to die is not otherwise obligated to file a Form 706, it must be filed to preserve portability. For Form 706 to be complete, all of the assets owned by the decedent at his or her date of death must be properly valued and listed.
  2. Portability is valid until December 31, 2012. What will happen to the transferred portion of the unused exclusion if a first spouse passed away in 2011 or 2012 and the second spouse lives past January 1, 2013, is as clear as a puddle of mud. Some in the industry have argued that portability is only valid if both spouses pass away in the portability time period of 2011 or 2012. Others state that the law was intended to allow the second spouse to carry portability until the second spouse dies. I would guess the latter group has more older male clients with much younger wives.

On June 17th, the IRS finally issues temporary and proposed regulations for portability. Yes, it has been 18 months since portability was instituted. But, this type of uncertainty is just the way it is in the estate planning world right now. The IRS regulations gave some context to electing portability, including:

  • If the estate of the first spouse is below the exclusion amount, the deadline for electing portability is still the due date of the Form 706, i.e. 9 months from date of death of the first spouse.
  • If the estate is below the exclusion amount, an electing personal representative will not have to report the value of property subject to the martial and charitable deductions.
  • An electing personal representative must include a calculation of the decedent’s deceased spousal unused exclusion (“DSUE”) amount, i.e., the amount eligible for portability when filing Form 706.
  • Only the personal representative can make the election. So if the surviving spouse is not the personal representative, and the personal representative decides to not file Form 706 or make the election, the surviving spouse cannot overrule the personal representative.

Portability codified what many people already do in their estate planning by creating what are known as A/B trusts or “credit” shelter trusts to save on estate taxes. Portability also reduces the need for married couples to retitle assets to equalize their respective estates for the federal estate tax exemption levels purposes. But, if you live in a state with state estate taxes, like Maryland or DC, you will still need to create some form of credit shelter trust to diminish the impact of any state estate taxes.

Until the end of 2012, portability provides some protection to those that do not plan but it is not a substitute for proper estate planning or updating your plan for life changes or changes in the law.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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