On January 23, 2013

It wasn’t very long ago that the nation’s economists and politicians were wringing their hands over the so-called fiscal cliff. It permeated the news cycle and had many Coloradans wondering just how worried they should be about major tax hikes and the loss of some valuable exemptions.

One of the major exemptions in question was for estate taxes. The American Taxpayer Relief Act, passed by the Senate on New Year’s Eve and the House of Representatives the following day, preserved the existing estate tax rate, allowing each of us to transfer $5.25 million tax free to an estate, either before or after death. (The original 2010 tax law amount was $5 million, but the IRS adjusted the amount for inflation.)

But the new law also introduced a concept known as portability, which is the ability to transfer the unused amount of this estate tax exclusion from the estate of a deceased spouse. That means a widow or widower is eligible for an estate tax exclusion of up to $10.5 million.

Previous to this change in the law, couples who wanted to shield their estate from taxes had to put their assets into what is known as a bypass trust or family trust. These trusts distribute funds to the surviving spouse or another family member until the surviving spouse dies, after which the remaining balance is passed on to other family members. The trust prevents the money from being subject to tax.

Portability eliminates the need for a bypass trust, but it isn’t automatic. To make the assets in a spouse’s estate eligible, the surviving spouse must file an estate tax return within nine months of the departed spouse’s death, even if no tax is due. The executor of the spouse who died must also transfer the unused exemption to the surviving spouse. Portability doesn’t apply to same-sex marriages or spouses who are not U.S. citizens.

If you’re thinking to yourself that this is complicated stuff, you’re right. And portability isn’t the only aspect of ATRA that could affect your estate planning. To learn more about what the fiscal cliff law might mean for you, it pays to consult an attorney who focuses on estate planning and administration.

Source: Forbes, “A Married Couple’s Guide To Estate Planning,” Deborah L. Jacobs, Jan. 11, 2013

Categories: Estate Planning

Tags: , , ,