Bill Makes Estate Tax Exclusion Portable

February 16, 2011

There were some big changes to the estate tax parameters included as part of the new legislation signed into law by the president on December 17th that is being called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
The lead story from an estate planning perspective involved the rate of the tax and exclusion amount. Rather than the $1 million exclusion that was scheduled upon the expiration of the Bush tax cuts the exclusion is set at $5 million, and the rate of the tax is now 35% rather than the 55% that was on tap.
Is worthwhile to underscore the fact that this $5 million estate tax exclusion is for each individual. So if you are married you and your spouse have a total combined estate tax exclusion of $10 million to work with going forward in 2011 and 2012. If you think this through, a logical question will arise: If I passed away would my spouse get to use my $5 million exclusion as well as his or her own?
In estate planning circles this idea is defined as the issue of "portability." To many observers the estate tax in and of itself is unfair, so as you might expect most of the rules surrounding it tend to defy logic as well. Until the passage of this new tax relief legislation in December the answer to the above question was no, your surviving spouse could not use your estate tax exclusion if you were to pass away.
The reason why this is unfair is because the estate that is accumulated by a married couple is the product of the earnings and investments of each individual; this wealth represents the combined efforts of two people. When one of these two people passes away his or her contribution to the estate still exists and it is taxable, but his or her exclusion is not available to defray the tax liability.
As a result of the new law the estate tax exclusion is now portable, and your spouse can indeed use your $5 million exclusion if either of you were to pass away. Unfortunately, the new measure is only available for the next 22 months and dies with the sunset provision in 2013. Who knows what the law will look like at that time, but at least there is now a "toe in the door."

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