Taking Advantage of the Current Portability Provision

Currently, all taxpayers have a gift and estate-tax exemption of up to $5 million. This exemption will change in 2013 unless Congress acts. Any unused portion of the exemption can pass to the deceased taxpayer’s surviving spouse as long as the taxpayer died after December 31, 2010.

Before the current exemption rates, taxpayers would typically include bypass or credit-shelter trusts in their wills. These specialized trusts preserved the taxpayer’s exemption amount when he or she died and passed the remaining assets to his or her surviving spouse. When the first spouse died, his or her exemption would transfer to a trust that was structured to give the surviving spouse distributions. Upon the surviving spouse’s death, the trust’s assets would pass to his or her heirs tax-free.

Today, the portability provision helps couples utilize the exemptions even if their wills fail to address the matter. For couples with estates valued around $7 million, with retirement plans and real estate making up the main assets, it is more beneficial to use the portability provision to pass all assets to a spouse upon death.

Wealthy couples should keep in mind that Congress may not extend the portability provision. If Congress does extend the provision, the carryover amount could still change. For couples with estates valued over $10 million, it is best to continue using bypass trusts.

Even if portability expires in 2013, taxpayers can still preserve any unused exemption amount by gifting it away before 2013.

See Alexis Leondis, Wealthy Take Estate-Tax Exemptions Beyond Grave Until 2013, Bloomberg, Aug. 16, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.