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How changes to the law affect portability

Texas residents may have heard of some changes to estate planning law that went into effect at the beginning of 2013, and they may wonder how the changes could affect them. The American Tax Relief Act of 2012 was passed by Congress and signed into law by President Obama on Jan. 2. One of the most important provisions of this new law is that it takes temporary portability between spouses and makes it permanent. Understanding portability can be essential to estate planning.

Portability was created by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. It allows a spouse who dies without using the full estate tax exclusion to transfer remaining amounts to the surviving spouse, who can then add the remaining amount to his or her own exclusion amounts. The amount that is transferred is called the “deceased spouse unused exclusion amount.” The unused exclusion amount can be used to reduce the deceased spouse’s estate tax liability.

For example, assume that a husband died in 2011 with an unused exclusion amount of $4 million. His estate elects to transfer that $4 million to his wife. If she dies in 2013, when the exclusion amount is $5.25 million, that amount is added to the $4 million. The wife may be able to exclude $9.25 million of her estate from being taxed upon her death.

A local estate law attorney may be able to assist couples in determining whether to exercise portability or whether to give away gifts during life to reduce the amount of their estates. The attorney may be able to explain the difference between gift taxes and estate taxes. That information can be used to help a person determine the best way to structure an estate plan.

Source: Forbes, “Estate Tax Portability – New Paradigm For Estate Planning“, Lewis Saret, July 20, 2013