Estate planning is a personalized affair. While there are general rules and principles that apply in all cases, at the end of the day each plan is tailored for an individual’s exact situation. A one-size-fits-all approach to this work is misguided and often leads to problems down the road. For one thing, there is a world of difference between planning for married couples and singles. Failing to take those differences into account may be problematic. A recent article provides a helpful background on which to discuss those issues.
Portability Now Permanent
For example, married couples are able to take advantage of an option known as “portability.” Seemingly made permanent in the law thanks to the fiscal cliff compromise bill, portability refers to one spouse’s ability to use to use the other’s unused estate and gift tax exemption. Essentially, this allows a spouse to transfer up to $10.5 million tax free. In the past, bypass trusts were use in order to preserve exemptions. However, with this new law, those trusts may not be necessary for that exact tax-saving feature–though they still could prove useful for other purposes.
A few caveats on portability. First, as of right now, same sex couples do not receive this benefit. Even though these couples are afforded the same protections under New York law, the same is not true according to federal law. That all may change this summer when the United States Supreme Court hears arguments in a case challenging the constitutionality of the Defense of Marriage Act. However, until that time, same sex couples need to be mindful of how the rules affect them differently. More complex estate planning is still necessary to provide full protection.
Second, portability only applies to spouses who are U.S. citizens. If the surviving spouse is not a citizen, then that spouse cannot take advantage of their spouse’s remaining exemption.
Third, it is critical not to assume that portability works automatically. It doesn’t. Spouses who want to take advantage of this benefit must be proactive in their efforts. Specifically, an estate tax form must be filed after the first spouse’s passing–even if no tax was due. This seem like a simple affair, but without proper professional help, it is easy to forget this step and lose the ability to apply the spouse’s exemption later on. Literally millions of dollars may be lost in taxes by failing to file this simple tax form.