For the next two years, 2011 and 2012, married couples have a unique estate planning opportunity available to them that has never existed. The fact that this opportunity may not exist at the beginning of 2013, makes planning decisions revolving around this opportunity even more complex. For the next two years, a spouse can inherit their deceased spouse’s estate and gift tax exemptions to the extent those exemptions are unused. This is called portability of the deceased spouse’s exemption.
Traditionally, spouses would include exemption planning in their estate plan to preserve the first-to-die unified credit by creating a separate exemption trust funded with assets valued up to the exemption amount for the year that their spouse passed away.
For 2011 and 2012, that type of planning is not necessary as portability allows the living spouse to inherit the deceased spouse’s exemption. This will make estate plans more simplified for the two years portability is in existence, but it is not without certain concerns.
One concern is that if an estate plan omits exemption planning and a spouse passes away in 2013, the deceased spouse’s exemption will be lost leaving the surviving spouse’s estate vulnerable to greater estate tax liability. Another is that the surviving spouse, to preserve the decedent’s exemption, must file a federal estate tax return in a timely fashion even if the assets are not greater than the exemption amount for those two years (currently $5 million). Additionally, the asset protection of the exemption trust for the surviving spouse is lost.