Estate Tax Planning Update - Part 2/ Exemption and Portability

The new tax law signed by President Obama allows a person to pass $5 million at his/her death without any estate tax. This means a married couple can pass $10 million. Additionally, one can pass the first $5 million directly to the surviving spouse. This is referred to as portability. Previously, a married couple had to utilize a credit shelter trust or family trust to shelter the exemption amount from estate tax. This trust also protects assets from creditors, predators and remarriage issues.

Under the new law, even when the exemption amount ($5 million) is passed directly to the spouse, they still get to use the $5 million exemption from the first death. As with most good things in life there is a "but" involved. So, $5 million can be passed from one spouse to another directly and still qualify for the $5 million exemption, BUT, the surviving spouse must file an estate tax return (form 706) at the first death. This tax form can be daunting as it can be complicated and require appraisals and proof of values. Because virtually all 706 forms are personally reviewed by and IRS agent, the audit risk is very high.

There are other rules dealing with remarriage that will be the subject of another post, but for now just know that a surviving spouse is not allowed to stack exemption amounts should they remarry.