New Estate Portability Feature for Married Couples

Prior to the 2010 Tax Relief Act, the estate tax exemption was on a per person basis. For example, when the exemption was $1 million if we had one spouse who had $500k in assets and the other spouse had over $1 million.  If the spouse with $500k in assets passed away they would lose the $500k unused credit.  For 2011 and 2012, Congress has allowed this unused exemption to move to the surviving spouse. Finally, fixing a problem that has always existed in estate tax planning to insure that we had the right number of assets with each spouse.

Under the 2010 Tax Relief Act, any exemption that remains unused as of the death of a spouse who dies after Dec. 31, 2010 (the “deceased spousal unused exclusion amount”) is generally available for use by the surviving spouse, as an addition to the surviving spouse’s exemption. A surviving spouse may use the predeceased spousal carryover amount in addition to his or her own $5 million exclusion for taxable transfers made during life or at death. In technical terms, the Act achieves this result for decedents dying and gifts made after 2010 by defining the applicable exclusion amount as the basic exclusion amount ($5 million for 2011, as indexed) plus the deceased spousal unused exclusion amount.

If a surviving spouse is predeceased by more than one spouse, the amount of unused exclusion that is available for use by such surviving spouse is limited to the lesser of $5 million or the unused exclusion of the last such deceased spouse.

A deceased spousal unused exclusion amount is available to a surviving spouse only if an election is made on a timely filed estate tax return (including extensions) of the predeceased spouse on which such amount is computed, regardless of whether the estate of the predeceased spouse otherwise must file an estate tax return. In addition, notwithstanding the statute of limitations for assessing estate or gift tax with respect to a predeceased spouse, IRS may examine the return of a predeceased spouse for purposes of determining the deceased spousal unused exclusion amount available for use by the surviving spouse.

We assume that this carryover will get scaled back if the law reverts in 2012.  Once again, Congress has put us in a position to have to deal with Estate Taxes after 2012. No surprise – a major election year.

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