Portability of Unused Estate Tax Exemption under TRA 2010
By Ater Wynne LLP,
Oregon law firm
In December, 2010, the Tax Relief Act of 2010 (TRA) was signed into law. While TRA extends many of the so-called Bush tax cuts, it introduces new concepts into the gift and estate tax law. One such concept is that of portability which permits the surviving spouse to take the unused portion of the last deceased spouse’s federal exemption and aggregate it with the surviving spouse’s unused portion. For example, currently each living spouse has a lifetime exemption from gift and estate tax of $5M. If Husband dies in 2011 with an estate of $3.5M which he leaves to Wife, there is no estate tax because of the marital deduction. But Husband has not used any of his $5M exemption (assuming he made no taxable gifts in previous years). Wife dies in 2012 with an estate of $7M. The executor of Wife’s estate may have available all of the Wife’s exemption of $5M and Husband’s unused portion needed to reduce the federal estate tax to zero. Depending upon the state of residence of Husand and Wife, there may be state inheritance/estate taxes to pay. For example, my state of Oregon exempts the first $1M of assets with no portability so Wife would only be able to exempt $1M from Oregon inheritance tax and Husband lost the ability to exempt $1M.
Portability is not automatic. To take advantage of Husband’s unused exemption, Husband’s executor would have to file a federal estate tax return on which the unused portion is calculated and affirmatively allocated to Wife. Without such a filing, Wife’s estate is unable to take advantage of portability.
What would happen if Wife remarried before her death and Husband 2 predeceases her? Wife in this case could not take advantage of Husband 1’s unused portion because Wife’s last deceased husband is Husband 2. If Husband 2 has unused his exemption and his executor files a federal estate tax return complying with TRA, Wife can take advantage of Husband 2’s unused exemption. If Husband 2 has used his exemption amount at the time of his death, Wife is left with her own unused exemption.
The new defninition in TRA to take account of portability is “Basic Exclusion Amount”. The Basic Exclusion Amount is the term now used for the term “applicable exclusion amount” which is currently $5M. The definition of Applicable Exclusion Amount is the Basic Exclusion Amount plus the Unused Basic Exclusion Amount of the last deceased spouse (Applicable Exclusion Amount =Basic Exclusion Amount + Portable Amount).
Planners now need to be thinking about address portability in prenuptial/postnuptial agreements as well as considering portability in planning the wills and trusts of married couples.
For a summary of TRA 2010 click here.