Before 2011, if someone died without using all of their estate and gift tax exemption, it was lost forever. In 2010, a law called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act was passed, allowing for “portability” – the ability for a surviving spouse to use their deceased spouse’s unused exemption amount. This can help with estate planning, but it’s only temporary and may not apply to certain taxes. It’s important to plan with portability in mind to avoid missing out on this opportunity. Portability might become permanent, but it’s not certain yet. President Obama’s administration and some lawmakers want it to stay. When deciding whether to use portability in estate planning, it’s important to consider factors like cost, the size of the estate, and state estate tax concerns. To compare different plans, look at a traditional plan with trusts and a basic portability plan with “I love you” wills. Cost is a big factor, so it’s important to weigh the costs and benefits with a professional. Portability planning is important for both lifetime and estate planning. It can be difficult to quantify the costs, but not planning for portability could end up costing more in the long run. Settlement costs for traditional plans are generally higher than for basic portability plans. If an estate tax return is required, the cost difference between the plans is minimal, but there is added time and effort to explain the decision. Administering a traditional plan after death may also be more expensive. Overall, the benefits of portability planning need to be considered when weighing the costs. Portability in estate and gift tax laws allows for the unused exemption from one spouse to be transferred to the other spouse when they die. This can help save on estate taxes.
However, there are some rules to be aware of, and the benefit of portability might not be available after 2012. It’s important for advisors to explain the potential benefits and risks of portability to their clients, and to document the discussion.
One benefit of portability is that when assets appreciate in value, they get a step-up in basis when the surviving spouse dies. This can be helpful in certain situations.
When considering whether to use portability, advisors should look at the size of the couple’s estate. Generally, for estates below $5 million, a basic portability plan could be a good idea. For larger estates, other factors need to be considered to determine the best plan.
It’s important to also consider the types of assets the couple has when making these decisions. If a married couple relies on portability for estate planning, the surviving spouse may end up paying more in estate taxes if the assets grow over time. For example, if Husband leaves everything to Wife and she uses portability, and the assets grow in value, the amount subject to estate tax could be higher than if they used a traditional plan. In a traditional plan, assets would be divided equally and sheltered from estate tax in a by-pass trust. So, it’s important to consider both estate taxes and income taxes when planning. Portability planning for estate administration is important for older spouses, as it can provide financial benefits. It’s also important for younger spouses, who may have a greater estate tax exemption. Portability planning should not be seen as simple, but rather as a way to protect assets and make sure they are distributed according to the client’s wishes. Marital status and agreements can also affect estate planning, especially in non-first marriages. If the law becomes permanent, we may see new provisions in marital agreements related to portability. Portability is when a surviving spouse can use the unused portion of their deceased spouse’s estate tax exemption. But there are some things to consider, like the GST tax and state death taxes. Also, there are still some unresolved issues with portability that planners need to be aware of. One issue is the possibility of “portability recapture,” where the IRS could take back some of the unused exemption. It’s important for planners to stay updated on these issues. H1 and W were married and owned everything together. H1 died and W remarried H2, but H2 also died. W gave $10 million to her kids and then died herself. The government taxed her on the money she gave to her kids, even though she thought it was covered by her first husband’s estate. The rules for how a deceased person’s unused estate tax exemption can be passed on to their spouse are confusing and have some unclear parts. The people who make the rules about taxes might need to fix these problems. One example they gave to explain the rules was wrong, which adds to the confusion. It’s also not clear if the rules apply to people who are not U.S. citizens or residents. There are also still some unanswered questions about how to make the choice to use these rules. Portability was introduced to make estate tax planning simpler, but it can actually make things more complicated for some people. The law doesn’t cover everything, like making a “protective election” or what happens if the estate tax return is amended. The original idea was to help smaller estates, but it may have unintended consequences. In the next part, we’ll talk about some strategies for this type of planning. The Tax Relief Act of 2010 changed the estate tax laws for 2011 and 2012. It allowed a deceased person’s unused estate tax exemption to be transferred to their surviving spouse. The IRS also increased the exemption amount for 2012. There are some rules and deadlines to follow to take advantage of this benefit. Some people believe that this change doesn’t work well with other tax planning, but there are ways to make it work. The government is also considering more changes to the estate tax laws. The American Bar Association has submitted a letter to the IRS about these changes. This passage discusses the complexities of estate planning and the potential impact of the Sensible Estate Tax Act of 2011. It explains the concept of “portability” in estate planning and how it may actually make things more difficult for some people. The passage also gives an example of how portability rules can result in the loss of a deceased spouse’s exclusion amount. Overall, it points out the potential issues with portability and traditional estate planning methods. When someone dies, their assets have their value adjusted for tax purposes. This can be a higher value if the assets have gone up in price, or a lower value if they have gone down. In the next article, we will explain these benefits in more detail. The exemption for estate taxes was increased to about $5 million in 2012. We will also discuss a modified plan in the next article. The amount that can be exempt from taxes is the sum of the deceased spouse’s exemption and the surviving spouse’s exemption. Any tax decisions should be made on time and accurately. In 2012, the exemption amount would increase to about $10 million due to inflation. It’s important to consider how estate tax exemptions will be elected when advising clients with pre- or post-nuptial agreements. The IRS issued a notice about unclear issues and asked for the public’s comments. Some specific rules and publications may be found at the indicated sources. The article discusses changes in tax laws and how they affect married couples. It includes examples and opinions of the authors. The authors work for a bank and have legal and tax expertise. The article was submitted by the Tax Section of The Florida Bar.
Source: https://www.floridabar.org/the-florida-bar-journal/estate-planning-with-portability-in-mind-part-i/
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