Friday, January 11, 2013
For married couples, the passage of the fiscal cliff bill, also known as the American Taxpayer Relief Tax Act of 2012 (ATRA), brought good news. For one, both the portability provision and the marital deduction were made permanent by ATRA. Unfortunately for some, the provision only helps taxpayers that passed away after December 31, 2010 and does not apply to same-sex married couples or if the surviving spouse is not an United States citizen. What is important to remember about portability is that the process is not automatic. The executor that is managing the estate must transfer the unused portion of the decedent's lifetime gift and estate tax exemption to the surviving spouse. The executor must file "an estate tax return when the first spouse dies." A taxpayer must take into account several different aspects of the portability provision. First, the portable amount is not adjusted for inflation. Second, it does not apply to the exemption for GST taxes. Finally, the usefulness of the portability exemption does not replace the usefulness of a bypass trust.
An additional important aspect of portability occurs when the surviving spouse remarries. If a surviving spouse takes the exemption of their first spouse and remarries, they are not allowed to hold on to their first spouse's exemption if their second spouse passes away before them. The surviving spouse is only allowed to take the unused exemption of their second spouse.
See Deborah L. Jacobs, A Married Couple's Guide To Estate Planning, Forbes, Jan. 9, 2013.