Beginning in 2011, however, the inclusion of portability language in the Act meant that the unused portion of a deceased spouse’s exclusion could be transferred to a surviving spouse by filing an estate tax return on the decedent’s behalf. For example, if a husband died in 2011 and used up only $1 million of his $5 million exclusion amount from federal estate and gift taxes, the $4 million unused exclusion amount could be transferred to the surviving spouse. As a result, the surviving spouse could then transfer up to $9.12 million estate and gift tax free by utilizing her exclusion amount of $5.12 million (for 2012), and her deceased spouse’s unused exclusion amount of $4 million. This amount could be used to exclude gifts made during lifetime or transfers made at death.
Like the increased exclusion amount and lower tax rates, however, portability is scheduled to expire at the end of 2012 unless new federal legislation is passed extending existing laws or creating new laws that include it. For this and other reasons, it has never been a good idea to rely solely upon portability as a shortcut to properly arrange your affairs. For couples with estates that could be affected by estate taxes, traditional estate planning, including utilizing marital and credit shelter trusts, splitting assets between spouses to equalize estates, lifetime gifting, etc., should continue to be utilized as the primary means of estate planning.
As long as portability exists, whether it is through the end of 2012 or beyond, it is a good idea to consider portability an unexpected bonus, not a planning tool. And for that reason it is a good idea that surviving spouses who received their deceased spouse’s unused exclusion amount consider utilizing it before its scheduled expiration on December 31, 2012 by making lifetime gifts to their heirs.
If we have learned anything recently it is that laws can change quickly. If you are relying upon the extension and permanence of portability as your primary means of planning to minimize estate taxes instead of taking advantage of traditional planning options, you could be leaving your heirs with a very expensive tax bill after you’re gone.