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File an estate tax return to take advantage of portability

One of the great provisions under current tax law is that, in addition to the historically high gift and estate tax exemption amount of $5 million per person, spouses have the opportunity to take advantage of any unused portion of their deceased spouse’s exemption amount.

This option, referred to as exemption portability, gives a couple the opportunity to shelter up to $10 million from estate taxes.

Before this option was available through the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, estate planning attorneys would set up a set of trusts to ensure each spouse would be able to take advantage of his or her exemption, and to allow the surviving spouse to receive all the income from the deceased spouse’s estate and have access to the principal.

With portability, a surviving spouse has unlimited access to the deceased spouse’s assets during her life, and she can pass those assets to the following generation during her life or at her death.

The important thing to realize is that portability is not automatic. In order to take advantage of any unused exemption amount, the surviving spouse must make an election on the estate tax return of the deceased spouse. At this point, less than 1 percent of estate of the deceased people even owe and estate taxes, but it is important to file an estate tax return anyway, in order to take advantage of portability

Portability, along with the other provisions of the 2010 law, will expire at the end of 2012, and it isn’t clear whether it will be available in 2013 going forward.

Source: Accounting Today, “Preserving Estate Tax Spousal Exemption Portability and Avoiding Malpractice,” Donald R. Saxon, February 13, 2012.