Trust & Estates: Traps in Estate Tax Portability


One of the estate tax breaks included in the tax bill that Congress passed in December 2010 added the concept of "portability" for spouses, upon the death of the first spouse.

Under the current tax laws, each individual has an estate tax exemption amount (currently $5,000,000) for which they can pass lifetime gifts and inheritances (combined) without incurring any estate or gift tax. Transfers to spouses are excluded from estate and gift taxes.

Under prior law, the exemption amount of the first spouse to die had to be used upon his/her death or it would be lost forever. An exemption amount could not be shared or carried over, which it can be under the "portability" provisions.

While "portability" can be useful in many cases where spouses have not engaged in comprehensive estate planning, there are several reasons not to rely on "portability", but rather to make use of some exemption amount at the death of the first spouse.

Among the traps and key considerations are:

  • The "portability" rules are currently in effect only for persons dying in 2011 and 2012. While most estate planners anticipate that Congress will extend the "portability" provisions, relying on Congress to make timely, practical tax legislation is questionable.
  • Utilizing the first spouse to die's exemption amount by placing the amounts in a credit shelter or similar trust offers creditor and asset protection as well as helping to ensure an inheritance for family members or other desired heirs.
  • The law requires that the executor of the first spouse to die make a timely election on an estate tax return. If an estate tax return is not filed in a timely manner (currently 9 months after an individual's death), the portability"option is likely lost forever. A timely filed return to reserve "portability" is required even though the estate is not otherwise required to file.
  • Placing appreciating assets in a trust at the first spouse's death keeps the appreciation from being reflected in the surviving spouse's estate at his or her death, possibly saving taxes. Once the assets are set aside at the first spouse's death, they are effectively exempt from any further estate or gift tax.
  • State inheritance tax laws are currently not reflective of "portability". While Oklahoma does not have an estate tax for persons dying after December 31, 2009, there is some possibility that the Oklahoma inheritance tax might return in some form at a later date.

Individuals should have their estate plans reviewed to see how they might be implemented in the era of "portability". Those who have a family member die should contact an estate planning lawyer to ensure they make proper elections regarding the use of "portability".

Harry V. Rouse
(918) 591-5325

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Justin B. Munn

Justin B. Munn

Justin represents clients throughout Oklahoma in family law, civil litigation, guardianships, adoptions, estate planning, trust and probate matters. 

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