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The current issue (volume 23, Issue 1) deals with Estate Tax Portability. Like most of these "free" publications the authors tell you just enough to make you dangerous. On the other hand you know some of the pitfalls and what to look out for when advising clients. If you have not researched this area, it might be a good idea since there is so much money involved.
The issue points out the following points in its two page article:
- Choices in federal estate taxes is "a roulette-wheel like process." (Nice way to put this.)
- The 2010 Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act the act gives the second spouse to die the ability to use any unused portion of the gift and estate tax exclusion of the previously deceased spouse (This is called portability).
- The first spouse to die has to timely file an Estate tax return (whether or not the first spouse is required to file) to protect the right of the estate of the second spouse to use the deceased spouse's unused exclusion amount.
- The Internal Revenue Service can audit the Estate tax return of the first spouse to die forever (regardless of the amount of time has passed from the death of the first spouse to the death of the second spouse) to re-determine the amount of the exclusion properly allocable to the second spouse to dies' estate. The IRS is not bound by the first filing.
- The second spouse to die cannot remarry or that spouse will loose the right to portability. The portability applies to the last spouse to die regardless of how many spouses have died previously.
- The amount of the prior spouse's unused exclusion will reduce estate and gift taxes, but does not reduce generation skipping transfer taxes.
- The portability feature is set to expire at the beginning of 2013. Like so many tax laws today, those that benefit us are usually temporary but those that cause us to pay more taxes are usually permanent. Portability could be extended at the whim of our congress.
- Under current law the amount of the estate and gift tax exclusion will revert to $1 million at the beginning of 2013.
- The 2010 Act indexes the basic exclusion amount to inflation (The government uses their adjusted inflation amount which in no way represents the loss of buying power on essentials needed to live.) The unused exclusion amount of a prior spouse is not indexed to inflation.
- Using portability gives the entire combined estate of both spouses a step-up in basis for income tax purposes at the death of the second spouse.
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