February 6, 2013

In light of the fiscal cliff bill, a recent article in Forbes offers some estate planning advice for married couples.

One important item made permanent by the fiscal cliff bill was portability, the ability for a widow or widower to increase their $5.25 million tax-free amount by the unused exemption of their recently deceased spouse. When using the two exclusions in tandem, a widow or widower can potentially transfer up to $10.50 million tax-free.

Regardless of portability, spouses are able to transfer unlimited funds to each other both during life, as well as part of their respective estate plans. This is known as the marital deduction. Without portability, however, the first spouse’s tax exemption is often lost when the second spouse dies. Careful tax planning maneuvers, such as bypass or credit-shelter trusts, are often used to avoid this problem.

With the extension of portability, spouses who qualify will not have to create bypass or credit-shelter trusts for the sole purpose of preserving their deceased spouse’s federal exemption amount. The extension of portability only applies to spouses who died after December, 31, 2010. It is important to remember that portability is not automatic. In order to utilize this tool, an estate planner will have to assist you in transferring the unused exemption to the surviving spouse.