In our previous post, we began looking at estate tax portability, which allows widows and widowers to carry over any unused portion of their estate tax exemption amount and apply it to their own estate at their death.
We noted that it is necessary for the executor of the deceased spouse-often the surviving spouse-to file an estate tax return in order for the surviving spouse to take advantage of portability. Here we want to mention the use of portability within the gifting context.
Beginning this year, the current $5 million exemption amount can be used to transfer assets during life or at death. Under IRS rules, those wishing to use the exemption amount for lifetime gifting must keep records and report gifts to the IRS. The amount used for gifting will be subtracted from the amount available at death.
Married couples have the additional advantage of being able to give more to their children in lifetime gifting by using the gift-splitting technique. Gift splitting allows married people to gift their exemption amount to the same person, giving that person twice as much.
One of the possibilities for married couples, particularly those where one party doesn't need their $5 million exclusion, is to set up an arrangement where both exclusion amounts are combined and used for lifetime gifts. The wealthier spouse would then be able to give more to his/her children free of tax.
Taking advantage of the tax exemption amount through portability and gifting opens up possibilities for married couples of which they may wish to take advantage. Consulting an experienced attorney will be a great asset toward that end.
Source: Forbes, "How To Use The New Tax Break For Married Couples," Deborah L. Jacobs, August 21, 2011.