New Simplified Estate Planning For Married Couples: Portability of the Estate Tax Exemption

Most married couples prefer to own property jointly with the right of survivorship and to provide through their wills or otherwise that when one spouse dies, the other spouse receives everything.  So, generally speaking, married couples want what are known as “I love you wills,” which provide as follows: when I die, you my lovely spouse receive everything; if you die before I do, everything goes to our children when I die.

But estate tax laws have taxed high net worth couples heavily if the first spouse to die left everything to the surviving spouse.  If such couples prepared simple “I love you wills,” or owned all of their property jointly with right of survivorship, there were no tax consequences upon the death of the first spouse, but the estate of the second spouse got hammered with estate taxes.  As a result, in order to take full advantage of the estate tax exemption, traditional estate tax planning has required couples to set up what are known as “bypass trusts” or “family trusts” and to realign ownership of assets so that each spouse owned substantial assets in his or her name alone without survivorship. These estate tax laws have complicated estate planning and added significantly to its cost. And, most of the time, this planning has prevented married couples from fully carrying out their basic wishes (i.e., to leave everything outright to the surviving spouse).

On December 17, Congress enacted a new estate tax law effective January 1, 2011, that essentially gives married couples a $10 million exemption ($5 million for each person) without complicated estate planning. A deceased spouse’s estate can transfer any unused portion of the exemption amount (i.e., up to $5 million) to the surviving spouse.  The 100% marital deduction survives under the new law. So if husband dies leaving everything to his wife, there is no estate tax.  Then, if wife dies thereafter having an estate of $10 million, her estate will not have to pay any estate tax because she has a $5 million exemption and her estate can use the $5 million exemption that her husband never used.  Estate planners are calling this “portability” of the estate tax exemption between married couples.

The new law simplifies estate planning for most couples. Assuming the combined size of the estate is under $10 million, married couples can safely own property jointly with the right of survivorship and can prepare simple “I love you wills” as opposed to the more complicated, costly and less desirable “bypass trusts” or “family trusts.”

There are some negatives, however.  This is a temporary two-year fix. Unless Congress takes some action, effective January 1, 2013, portability will disappear and the exemption will drop to $1 million per person (with a 55% estate tax rate).  If that happens, “bypass trusts” or “family trusts” and asset realignment will again become necessary for married couples to pass only $2 million to their children free of estate taxes. Most experts believe that Congress will act to prevent that drop-down and to preserve portability, but there is certainly risk involved in assuming that it will do so.

Another negative is that “portability” is not automatic; it requires the personal representative of the deceased spouse to file an estate tax return (even if no tax is due) in order to preserve the surviving spouse’s right to claim the unused portion of the deceased spouse’s $5 million exemption. If the deceased spouse’s personal representative neglects to timely file the estate tax return, the surviving spouse’s estate will not be able to use the unused portion of the deceased spouse’s $5 million exemption amount.

The new law is a major step toward simplifying estate planning for married couples. If you have questions about this law and its implications, please contact Pete Goergen at MG Law.

The materials on this website are meant for informational purposes only and nothing contained in this site is to be construed as legal advice. If you need legal advice, you should contact an attorney directly. Do not act upon the information on this site without seeking professional guidance. Information on this website about specific matters or success in previous cases is not meant to be a prediction or guarantee of similar results in any other case. Each case consists of factors and applicable law unique to that case and you should consult an attorney.