In 2013 Congress made permanent the estate tax exemption amount at slightly more than 5 million dollars, adjusted annually for inflation. This is a welcome relief after the constant fluctuations in exemption amount over the past decade. Another change is that the gift and estate tax are now “unified”: people can make lifetime gifts or gifts at death (testamentary gifts) and the tax result will be the same. Previously, tax-exempt lifetime gifts were limited to $1 million.
As a result, a single person dying in 2015 can leave assets of $5,430,000 and his or her estate will not pay any estate tax. (Provided no taxable lifetime gifts have been made.) With proper planning, married couples may leave a combined taxable estate of nearly 11 million dollars and not pay any estate tax.
With the 2013 changes to the Estate and Gift tax code there was a further change, possibly less visible. “Portability” was made permanent. This means that for a married couple, if the first spouse to die does not use up all of his or her applicable exclusion amount ($5,430,000 in 2015), whatever remains is “ported” over to the surviving spouse. It is not quite as simple as it first appears. First, the porting is not automatic. The deceased spouse’s executor must timely file an estate tax return electing portability. Another consideration is that if the surviving spouse remarries and survives a second spouse, the portability from the first spouse has been lost if it wasn’t used first for lifetime gifts.
Some advantages of portability are that no bypass or credit shelter trust is required to take advantage of a married couple’s combined applicable exclusion amount. Also the assets get a second step-up in basis at the survivor’s death, which is not true if the decedent’s assets have been placed in a bypass trust.
Portability does not address issues of control or asset protection that may be addressed with a bypass or QTIP trust.