Estate Planning for Couples

The American Taxpayer Relief Act of 2012 sets the estate tax rate at 40 percent for individual estates valued at over $5 million, indexed for inflation.

Additionally, can pass up to $10 million free of estate tax because a deceased spouse can transfer any unused tax exemption to his surviving spouse, a concept tax professionals refer to as “portability.”

Attorney and Journalist Deborah L. Jacobs  wrote an article for Forbes explaining how portability should factor into estate planning at different stages. Below is a summary of her suggestions:

Updating an Estate Plan

Spouses can pass an unlimited amount of assets to each other without any estate tax liability. This is called the unlimited marital deduction. Before portability couples were required to create bypass trusts to preserve the deceased spouse’s exemption amount. Otherwise, all assets left to the surviving spouse would be included his or her estate, and estate taxes would be due on any assets that exceeded the exemption amount.

Portability eliminates the need to use a bypass trust solely to preserve a deceased spouse’s federal exclusion. There are other reasons to use bypass trusts, such as sheltering appreciating assets or preserving a state estate tax exemption. But in many cases, if a couple’s combined assets amount to less than the amount both spouses could pass without an estate tax, they may not be necessary.

Making Large Lifetime Gifts

The American Taxpayer Relief Act of 2012 maintains the unification of the federal estate and gift taxes so that the gift tax exemption and the maximum tax rate is equal to the federal estate tax exemption and the maximum tax rate.

That means couples can pass more money to their children during their lifetimes. However, this reduces the amount that they can pass free of estate tax upon their death.

At a Spouse’s Death

In order to pass a deceased spouse’s unused tax exemption, the deceased spouse’s executor must file an estate tax return within nine months after the death of the first spouse. Otherwise, the surviving spouse loses their right to the unused exemption. Even if the couple isn’t wealthy, it’s a good idea to claim it because of wealth that may be acquired in the future.

At a Remarriage

It’s important to remember that a surviving spouse only gets the unused exemption of the most recent spouse to die. If he or she remarries someone that has used up his or her estate tax exemption and later dies, the surviving spouse is left with only his or her own exemption. The first spouse’s unused exemption is gone.

For more information on situations when bypass trusts are helpful despite portability, read: Does Portability Make Bypass Trusts Obsolete?