The Internal Revenue Service (IRS) recently clarified a new estate tax exclusion that allows a surviving spouse to exempt millions of dollars from his or her taxable income. While the estate tax exemption as a whole was in limbo for a while - Congress just reinstated it in December after having let it lapse through 2010 - it now features a so-called "portability provision" that has both wealthy couples and estate planning experts excited.
What Is the Portability Provision?
The portability provision is an attempt by the IRS to ensure that married couples get the maximum benefit of the estate tax exemptions available to them. For fiscal years 2011 and 2012, the IRS is allowing for $5 million of an individual's assets to be excluded from taxable net-worth upon death and $10 million of the assets of a married couple to be exempt. The portability provision essentially allows for the transfer of an unused exemption of a decedent to his or her surviving spouse, thus allowing more of the exemption to be used by the couple's total marital estate.
To break it down in simpler terms, the Wall Street Journal presented the example of fictional married couple Harry and Jane. If Jane dies in 2011 with an estate valued at $1.5 million, then she would still technically have $3.5 million in exemptions remaining (since the IRS allows for a total of $5 million in funds to be exempted from an individual's taxable estate). The portability provision allows her husband Harry to absorb the benefit of that remaining $3.5 million in exemption, allowing his total net worth of $6 million to be tax exempt (provided the proper paperwork has been filed to document Jane's remaining exemption amount) if he dies in 2011 or 2012.
These new tax laws - like anything tax-related - can be extremely beneficial if used correctly and quite harmful if applied improperly. Regardless of whether you have a sizable estate or a humble one, working with an experienced estate planning attorney or financial expert who can use the best available estate planning tools to take advantage of government-offered exemptions and exclusions is strongly recommended to ensure that your final wishes are honored and that as much of your estate transfers to your heirs as possible.