Estate Tax Question: What is "Portability"?

Estate Tax Question: What is "Portability"?

One of the features of the new estate tax law is "portability" of the estate tax exemption for married couples. What does this mean?

Under the Tax Relief Act of 2010 (TRA 2010), each individual is allowed to transfer up to $5 million, estate tax free, at death. This is referred to as the Estate Tax Exemption. In addition, an individual can transfer an unlimited amount of property to his or her spouse at death, without paying estate taxes. This is referred to as the Unlimited Marital Deduction.

Before TRA 2010 went into effect, if a married person passed away and left his entire estate to his spouse, two things would happen:

1. There would be no estate tax due because of the Unlimited Marital Deduction.

2. Without additional planning (like an AB Trust), the first spouse's Estate Tax Exemption would disappear.

Under TRA 2010, spouses enjoy portability of their Estate Tax Exemptions. This means that if the first spouse to pass away doesn't use up his or her $5 million exemption, whatever remains of that exemption is transferred to the surviving spouse. So, if a husband passes away in 2011 and leaves all of his property to his wife, this is what happens:

1. There is no estate tax due because of the Unlimited Marital Deduction.

2. The husband's $5 million Estate Tax Exemption is added to his wife's exemption. So, if she passed away in 2011 or 2012, she could transfer up to $10 million to her heirs without paying estate tax without establishing an AB Trust.

Does this mean that AB Trusts are obsolete? Not at all, and here's why:

Portability is not guaranteed past 2012. TRA 2010 is scheduled to sunset at the end of 2012. So, unless Congress affirmatively extends the portability provision for the years 2013 and beyond, only those who pass away this year and next year will benefit.

Portability is a matter of federal law, not state law. If you live or own property in a state that imposes its own estate tax, AB Trust planning may very well be necessary to reduce the taxes owed to the state revenue department.

Portability only applies to married couples. When it comes to tax law, cohabitating couples are not afforded the same treatment as married couples. So, if estate taxes are a concern, couples who are not married will need additional estate planning to minimize tax bills.

AB Trusts provide more than just tax benefits. An AB Trust also offers the surviving spouse protection from lawsuits and creditor claims. And for those in blended families, an AB Trust helps to ensure that your children and your spouse are both protected when you pass away.

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