The New Estate Tax Exemption and Portability: Panacea or Poison Pill?
On the eve of the new year, Congress agreed to a new “Basic Exclusion Amount” over which
estates will be taxed at 40%. The Basic Exclusion Amount (“BEA”) is $5,120,000 and is indexed
for inflation (we’ll round this to $5 million for discussion). Additionally, the provision of the law
allowing a spouse to retain the unused portion of his or her deceased spouse’s BEA (commonly
called “portability”) was made permanent.
Your Basic Exclusion Amount plus the ported amount from your deceased spouse (commonly
called the Deceased Spouse’s Unused Exemption Amount or DSEAU) equals your Applicable
Exclusion. As a result of the new law you may have an Applicable Exclusion available at your
death of over $10 million.
Easy enough, right? WRONG. There are many traps for couples whose plans were created
before portability and/or whose planning does not take it into consideration.
Portability Election
First, to actually port the exemption, you have to timely file a federal estate tax return. The
election is automatic, thus if it is not desired, the estate must affirmatively opt out.
In the past, estate tax returns were typically not filed for an estate with no tax due. However,
now if the deceased spouse’s assets are simply transferred to the survivor, a Form 706 may
need to be filed in order to preserve the Basic Exclusion Amount of the decedent.
Statute of Limitations
Generally, the statute of limitations for an estate tax return is three years from the due date of
the return. When the BEA is ported, the statute of limitations remains open until the statute
lapses on the surviving spouse's estate tax return. This is probably only an issue for estates
with assets other than residential real estate and stocks and bonds, but it should be a concern
that the amount of the exemption that was transferred can be reduced. Record retention will
be critical.
Loss of Ported Exclusion After Re-marriage
If you remarry after the death of your spouse you may lose the Exemption that you ported even
if you filed the return. A decedent may only use the ported exclusion of his or her last to die
spouse.
Example: My spouse dies and I filed Form 706 Estate Tax Return and port over his
unused exemption of $5 million. I then remarry someone that made a gift of $5 million
in 2012 in anticipation of a lower exemption. Thereafter, my second spouse dies before
me. I now have only $5 million of Applicable Exclusion.
The Power to Make the Portability Election
The Executor of the decedent is the party responsible for filing the federal estate tax return.
The Executor faces no tax liability or IRS penalty for failing to timely file where there is no tax
due. What is not clear is the responsibility of the Executor to the surviving spouse. If they are
not one and the same there could be disagreement over whether a return should be filed.
This is especially important for blended families and may need to be addressed in a pre or post
marital agreement. Another consideration for discussion between spouses and marital
agreements will be the effect of lifetime gifts on the Basic Exemption Amount.
Generation Skipping Tax Exemption
The generation skipping tax exemption is not portable. Even if a Form 706 is filed, the
maximum generation skipping tax exemption available to a surviving spouse’s estate is $5
million.
State Inheritance Taxes
Portability applies to the federal basic exclusion amount; it does not apply to state inheritance
taxes.
Inflation
Your personal Basic Exclusion Amount is indexed for inflation. However, the amount ported
from a deceased spouse is not. Thus, if the deceased spouse’s property appreciates in the
lifetime of the surviving spouse, not all will transfer free of estate taxes.
The Planner’s Responsibility
In order to protect both the advisor and the client, every client must be educated about the
pitfalls of the estate tax exemption rules. Among other things, each client should be
encouraged to enter into a Pre or Post Marital Agreement that includes this issue and to
consider filing a Form 706 upon the death of a spouse. If a client declines either the planner
should obtain a signed statement. Whichever direction a client chooses, record keeping is vital
for both their protection and the planner’s.
Bypass Planning
Bypass planning may remain desirable even for non-taxable estates. A bypass trust provides
the following:
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Protection from the Remarriage Penalty (loss of the ported exemption)
Protection from a Second Spouse’s Elective Share Rights
Creditor Protection Through a Spendthrift Bypass trust
Protection from Failure to File Form 706
Inflation Protection
Conclusion
Although portability may be a boon for older married couples with estates made up of assets
such as retirement accounts, personal residences and qualified annuities whose transfer has
income tax consequences which made bypass trusts undesirable, it contains many traps and
potential unintended consequences for the uneducated. Everyone should consult with their tax
and legal advisors to determine how it affects their plan.
Note to Florida residents
In addition to the recent changes in the federal estate tax law, amendments to the income tax
regulations that affect your retirement accounts and the enactment of the Health Insurance
Privacy and Portability Act, there have been many changes in Florida law that may affect your
estate plan. These include an overhaul of the durable power of attorney statute and the
homestead exemption.
ABOUT THE AUTHOR
611 West Azeele Street
Old Hyde Park
Tampa, FL 33606
813-251-1624
www.stratton-bandera.com
Janet Bandera, JD is admitted to
practice law in Florida, Illinois and
Missouri and has been working with
families and business owners since
1995, helping them preserve their
legacy through wills and trusts as well
as business succession planning.
Janet is a nationally recognized
attorney, author, lecturer and
teacher and has been designated as
AV Preeminent® by MartindaleHubbell®, a designation given to less
than 5% of women lawyers. Her
clients declared her a 5 Star Wealth
Manager® in 2011 and 2012.
Stratton-Bandera Law provides estate
and business planning from start up
to succession.