Scott N. Carter, Trust attorney, discusses the portability law that allows a deceased spouse’s unused exemption to be ported over to the surviving spouse.
With proper estate planning, there won’t be any estate taxes at the second death.
Portability Law Definition
Portability law is a fairly recent law in the last couple of years. What happened was in the old days when someone would come into my office, let’s say the surviving spouse, and the spouse that passed away they did not have trust.
While that spouse was in my office I had to explain to that surviving spouse that exemption was lost. In that situation, we were encouraging people to have a trust so we make sure we each have an exemption. However, under this new law of portability, the law allows what we call the DSUE – Deceased Spouses Unused Exemption to be ported over to the surviving spouse.
A simple example would be if the exemption was $12 Million that would mean that a married couple would have $24 Million of exemption, even if they didn’t have the trust done where it was split into two trusts with one becoming irrevocable.
Nowadays what we are doing is we are actually creating trusts because of the exemption being so high, that at the first death, the trust splits again into two trusts, or three if necessary. What happens is they both, or all the trusts are taxable at the second death.
However, with the exemption being so high, and the portability being elected on an estate tax return, now we don’t have any estate taxes at the second death. On top of that, we don’t have any income tax if the assets are capital assets and they are sold at the second death.
Prior to that at the first death, we were having half of the assets become irrevocable and making them so that the basis of the assets did not get what we refer to as a step-up. Therefore at the second death, those assets are now income taxable.
On the new process, by being able to do the trusts the way we are doing it nowadays, we can now not only avoid the estate tax we can avoid the income tax.
The portability law and the IRS have made it very simple, when someone passes away they file what is called an estate tax return. On that tax return, they have a portability election. The only way you don’t get the portability election is you actually check a box to elect out of it. It is a very simple process that makes sure that everyone who files this return gets this election and gets to preserve the deceased spouse’s unused exemption.
This is very important because we do not know the future will bring for tax law. We know that the way the tax law is written the exemption is growing. It has started at $11.18 Million and it is indexed to inflation so it will grow. It is set to expire on December 31, 2025. That does not mean that the Congress or the next president can’t change that and make it expire sooner or do something even more drastic.
The likelihood is that the exemption will go down somewhat as it sets in 2025 to go down to the exemption from 2017, plus inflation.
We know the exemption is going to be fairly high. It will be at least for a married couple over $10-$11 Million which means that most estates will not be taxable. That is why our focus has shifted from avoiding estate tax to avoiding income tax.
Scott N. Carter is a partner in a boutique San Jose law firm, Carter, Dougherty & McGuire. The firm’s business principles are driven by the needs of their clients. They are certified specialists in taxation, probate, estate planning, and trust law. Scott can be reached at 408-241-2121 or http://www.cdbatlaw.com.
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