The Estate Tax Portability Provision: Maximizing Your Tax Advantage

January 01, 2012

In recent years, estate tax provisions have been particularly favorable to taxpayers. In fact, out of the last 75 years, 2011 will see the second fewest number of estates owing any federal estate tax, 2010 holding the overall low mark.

Yet, favorable tax provisions may not last indefinitely, and even if no tax is owed on an estate, you can be throwing money away if you do not file a tax return with the help of Grand Rapids estate planning attorneys. So why file an estate tax return if nothing is owed? A surviving spouse may be able to claim their spouse's unused exemptions for their own estate tax returns thanks to so-called "portability provisions" in current federal law.

Unused Exemptions Can Be Transferred To Surviving Spouses

An estate is the sum of an individual's assets. When someone dies, their property, legal rights and other interests, less any remaining liabilities, pass to their survivors under the terms of a valid will or Trust or according to state intestacy laws (laws governing the distribution of the property of a deceased person who dies without having properly executed estate planning documents).

But, this transfer does not occur without the government taking its cut. The estate tax, otherwise known as the "death tax" or "inheritance tax," has been in place in one form or another in the United States for well over a century. When an individual dies, a given percentage of the value of their taxable estate is collected by the IRS.

Under current law, however, most estates do not incur tax liability thanks to generous exemptions. For 2011, the estate tax exemption for individuals is $5 million. This means that anyone who dies in 2011 leaving an estate worth less than $5 million has no federal estate tax liability. Additionally, estates worth more than $5 million only owe taxes on the excess (the amount over $5 million -- the IRS will not dip into the first $5 million at all).

When an individual leaves an estate worth less than $5 million, the unused portion of their exemption does not have to go to waste. The 2010 Tax Relief Unemployment Insurance Reauthorization and Job Creation Act contains a provision that allows for portability of estate tax exemptions between spouses.

Portability means that the unused portion of one spouse's exemption may be transferred to his or her surviving spouse. For example, imagine a husband dies with an estate worth $2 million. That $2 million will not be subject to any federal taxes, and the remaining $3 million of his exemption can be passed to his surviving wife. When she passes away, her $5 million exemption combined with the leftover $3 million exemption from her husband's estate means that the first $8 million of her estate can be distributed to her survivors completely tax free.

Careful estate planning is required in order to get the most out of portability. In order to retain the unused amount of a spouse's exemption, even when no tax is owed, an estate tax return that specifically provides for portability must be filed in a timely fashion after the first spouse passes away. If this return is not filed, the excess exemption is forfeited forever.

Get the Most Favorable Tax Treatment for Your Michigan Estate

Given the high dollar amounts involved, it may be easy to assume that estate tax portability is only beneficial to couples with estates approaching or in excess of the combined $10 million exemption threshold. But, preserving the exemption could benefit much smaller estates as well.

In 2013, if Congress takes no action, the estate tax exemption will revert to a $1 million limit, and the top tax rate will be 55 percent. Even if lawmakers do take action before the $5 million exemption sunsets, they may adopt an exemption far below the current $5 million. Preserving a spouse's unused exemption now, when exemptions are high, could save the surviving spouse's estate thousands of dollars, even if it is valued at less than $5 million.

Of course, future tax legislation could affect unused exemptions or change other aspects of estate tax law. That said, the only way to guarantee you will have all available tax advantages in the future is to preserve unused exemptions and take advantage of other estate planning tools today. If you have recently lost a spouse and want to know how you could benefit from estate tax portability, or if you have any other estate planning concerns, contact a Michigan estate lawyer today to ensure you receive the most favorable treatment under both federal and state tax laws.

Article provided by Willis Law
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