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Estate Planning and Portability Between Spouses

The American Taxpayer Relief Act (ATRA) of 2012 made permanent the federal estate tax exemption amount of $5 million (adjusted annually for inflation to $5.34 million).  ATRA also permanently established the estate tax concept known as “portability”.  While this change was intended to simplify estate tax exemptions for couples, some find it to be just as complex.  Read on to learn more about portability between spouses and how it could affect your estate plan.

Under ATRA, “portability” allows for a tax exemption to be easily transferred or carried over to a surviving spouse.  The Federal Estate and Gift Tax allows one exemption per person but with proper planning, portability can provide a married couple with two exemptions.

For many years, a common estate planning strategy for a married couple with assets worth more than the exemption amount was to divide the assets between the spouses and then create an estate plan for each spouse.  These separate plans would include the creation of a trust on the other spouse’s death.  Here, the exemption on the first spouse to pass away would be applied to the trust, therefore bypassing the tax.  The surviving spouse would then become the beneficiary of the trust during the period of survivorship and when he or she passed away, another exemption was applied and the assets in the bypass trust were, once again, not taxed.

Now, with portability between spouses, both spouses’ exemptions can be used without having to create separate estate plans or bypass trusts.  The executor of the first deceased spouse’s estate will have to file a federal estate tax return and elect to allocate the unused exemption to the surviving spouse.  This means that a federal tax return will have to be filed in order to “port” over the exemption which was not the case during the time of pre-portability.

Portability provides married couples with more options for planning.  It is a useful tool that should be considered when reviewing existing estate plans.  Couples are encouraged to consult an estate planning attorney to evaluate their existing plans in light of the advent of portability in order to determine if the plan is as flexible as possible.

It is important, too, to recognize that portability does not address all of the reasons why couples will use trusts in their estate planning.  Trusts can be used to leave assets to children, protect assets from creditors and to make use of other transfer-tax exemptions.

If you have questions about portability between spouses and how it affects your estate plan, we can help.  To discuss your specific needs and to find out how our estate planning attorneys in Pittsburgh can help you, please call Fingeret Law at 412.281.8222 or contact us online.