There are many reasons to revisit an estate plan every few years. One reason is that federal and state legislators are continually revising estate tax and inheritance laws. As one example, in recent years Congress sought to help widows and widowers to avoid federal estate taxes through the "deceased spousal unused exclusion amount." The DSUE amount, as it is more commonly known, allows for the surviving spouse to carry over up to $5.34 million of their deceased spouse's unused estate amount and add it to their own.
It has been the law for decades that a spouse can transfer or leave any amount to his or her spouse. However, before portability once the second spouse passed away any unused exemption amount from the previously deceased spouse was lost. Previously, the only way to bypass the estate tax for a surviving spouse was through a bypass trust. This is no longer the case, although there are still many valid reasons to have a trust in place, such as the flexibility a trust can provide when bequeathing assets.
The IRS has given the following example of portability:
Imagine one decedent dying with a $2 million estate. The surviving spouse subsequently dies later with an $8 million estate. If the spouse who died first claimed portability, the remaining exclusion amount of over $3 million would transfer to the surviving spouse. The surviving spouse would then have $8 million excluded from the estate tax ($5 million exclusion amount plus $3 million DSUE amount), and the estate wouldn't have to pay a federal estate tax.
In order to take advantage of portability, the surviving spouse must file a timely estate tax return claiming portability.
Recent IRS ruling on the issue
The Internal Revenue Service recently issued an announcement that simplifies the portability election for estates that did not file a timely estate tax return. On Jan. 27, 2014, the IRS determined that certain eligible taxpayers can obtain a portability exemption simply by filing a proper estate tax return. Before this ruling, taxpayers who had missed the deadline needed to request a private letter ruling from the IRS and pay up to a $10,000 user fee.
Estate taxes only one part of planning
While minimizing the tax burden of an estate is an important part of estate planning, it is by no means the only benefit. Ensuring that particular meaningful gifts are given to their intended beneficiaries, protecting heirs from creditors and planning for proper medical care late in life are all part of a comprehensive estate plan.
People seeking to create or update an estate plan should contact an experienced estate planning attorney to discuss their options and ensure their estate plan is up-to-date with current laws and their wishes.