Investor Education | Greater estate‐tax security for assets

Do you have assets that you plan to pass along to your spouse and other heirs? Of course, "you can't take it with you," but you may maximize the transfer of wealth without any dire estate consequences. One of the key tax law rules that can currently work in your favor is the "portability" provision.

Initially, the portability provision was scheduled to expire after 2012, but the American Taxpayer Relief Act of 2012 (ATRA) extended it permanently along with a generous $5 million federal estate-tax exemption (indexed annually  for  inflation).  Once  again, transfers between spouses remain completely sheltered from the federal estate tax.

Background:  Under ATRA, each spouse is entitled to an estate-tax exemption of $5.43 million in 2015,  up  from $5.34  million in 2014. (Life- time gifts in excess of the annual gift-tax exclusion may erode this amount.) Under the portability provision, a surviving spouse can  elect to use any unused portion  of the exemption of the estate of the deceased spouse.    Thus, a couple can effectively shield up to $10.86 million in assets in 2015—and more in later years—regardless of which spouse dies first.

This provision can enable a well-to-do family to avoid a steep estate-tax bill that could result if portability were not allowed. It's like having an extra layer of security to protect against estate tax.

Example: Tom Smith owns assets of $5 million, his spouse Jane owns $2.5 million, and the couple owns $2.5 million jointly with rights of survivorship.  Each spouse's will leaves their en- tire estate to the other and then to their two children.

If Tom dies first in 2015, all of his assets pass to Jane, who now owns a total of $10 million in assets. No estate tax is due as a result of the unlimited marital deduction. (For simplicity, we will not consider any appreciation or decrease in the value of assets.) When Jane dies, her entire estate of $10 million goes to the

Smith's two children. There is no estate tax then either because of the combination of the unused portion of Tom's exemption and Jane's exemption.

Note that the result would be quite different without the portability provision. Assuming that the $5 million initially left by Tom to Jane would have eventually been subject to estate tax at the top 40% rate, the heirs would have owed $2 million (40% of $5 million).

Although the portability provision creates greater flexibility in estate-tax planning, you still might incorporate other techniques, including a bypass trust, into your estate plan. Such a trust may protect assets from creditors or an ex-spouse and guard against spend-thrift children. It can be especially beneficial when one spouse or both spouses have children from a prior marriage.

Final point: The favor able tax treatment is not automatic. Portability must be elected on the appropriate estate-tax return. Coordinate the portability provision with other aspects of your estate plan.

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