Estate Tax and Portability

Estate Planning

For people who had their will prepared a few years ago, many attorneys used a formula clause to reduce the estate tax to as low an amount as possible. These formula trusts were filled to the maximum estate exemption, thus removing those assets from the survivor’s estate. The survivor then received the income from the trust and the heirs receive the principle. This was ok when the exemption was $600,000 or $1 million, but if the trust documents call for the maximum amount to go to the trust, now $5 million, then the survivor could be left with little or no assets in their name. According to Stephen Williams, a partner in an Indianapolis law practice, his firm uses disclaimers in order that the survivor can pick and choose the assets going into the credit shelter trust.

For couples with assets under $10 million, a new concept of portability was introduced. Portability allows each partner of a married couple to use the unused portion of the other’s estate tax exemption. In other words, if spouse A dies with a taxable estate of $2 million, then the unused portion of the $5 million exemption transfers to the surviving partner leaving spouse B with an $8 million exemption. That’s their own $5 million exemption plus the unused $3 million from spouse A. This makes estate planning easier and may eliminate the need for many credit shelter trusts.

The $5 million exemption is good for 2011 and 2012. For estates of those deceased in 2010, they get to use the $5 million exemption rule, or carryover basis if they choose. The top estate tax rate during this period is 35%.

About the Author: Michael Skehan

Michael Skehan, CPA, PFS, Senior Advisor is a well-known industry leader who has been recognized for his outstanding contributions both by his peers and community. Skehan was with RJ Pile for 44 years prior to retiring as managing partner to join WealthPoint Advisors LLC.