Q: Could you explain the new $5 million spousal portability rules? Does this do away with the unlimited exemption between spouses? What is the amount you can gift to a nonspouse without any tax?
A: Currently, $13,000 can be gifted annually to any number of people without having to pay any tax on the gift or file a gift tax return. If you are married, each spouse can gift $13,000 to one person for a total gift of $26,000.
Under the Tax Relief Act of 2010, enacted Dec. 17, 2010, an individual has a $5 million exemption from the federal Estate, Gift and Generation-Skipping Transfer Tax for tax years 2011 and 2012. In 2013, the exemption amount is scheduled to go to $1 million.
I think you may be confusing two related but separate tax rules concerning the spousal exemption. There is still an unlimited marital deduction, which was enacted under the Economic Recovery Tax Act of 1981. Transferring an unlimited amount of assets between spouses before or after death is allowed without being subject to the estate or gift tax. The spousal portability provision is new with the 2010 Act. Before this provision, if the deceased spouse didn't use all or a portion of his or her exemption, it was unavailable to the surviving spouse.
Example: A couple have a combined estate valued at $10 million, and one spouse dies, leaving everything to the surviving spouse. No estate tax is owed because of the unlimited marital deduction. Under the old rules, when the surviving spouse died, the property in the estate above the estate tax exemption amount was subject to estate taxes. Assuming a $5 million exemption, and no change in the value of the estate, $5 million would be subject to estate taxes. Under the new law permitting portability of the exemption amount, the surviving spouse can use the deceased spouse's unused exemption amount. In the example, zero federal estate tax would be owed upon the death of the surviving spouse because he or she would have a $10 million exemption (his or her own $5 million plus the $5 million DSUEA).
Greg Herman-Giddens, a Chapel Hill estate planning attorney, points out on his blog ( ncestateplanningblog.com ) that the unused exemption must be transferred from the estate of the first spouse to die to the surviving spouse.
"This can be done only by filing a federal estate tax return (Form 706), even if no tax is due. If the return is not filed, any excess exemption is forfeited and cannot be used at the death of the surviving spouse. Form 706 is due nine months after the death of a decedent, with a six-month extension available. Executors should file extensions now for decedents who died in early 2011 since the final 2011 Form 706 is not yet available."
The Tax Relief Act is effective only for 2011 and 2012, so portability may no longer be available after 2012.
If you have a large estate and want to save on estate taxes and/or make sure your wishes are carried out upon your death, a meeting with a knowledgeable estate planning attorney is recommended. He or she can discuss the pros and cons of credit shelter planning by using various types of trusts appropriate for your personal situation. Trusts may be beneficial to freeze appreciation of assets, allow for management of assets in the event of disability, offer creditor protection, control beneficiaries, etc.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question.
