Portability of the Estate Tax Exemption – A Bird’s Eye View

Portability of the Estate Tax Exemption – A Bird’s Eye View


The American Taxpayer Relief Act of 2012 (ATRA) extended and made “permanent” (that is, the exemption won’t sunset in 2 years as has been the case in the past) the $5 million estate tax exemption- currently a $5.25 million estate tax exemption after inflation indexing.

In addition, Congress gave us “portability” of the deceased spouse’s unused exclusion amount (DSUEA).  That amount can be carried over to a surviving spouse. The end result of these changes: married couples can shelter as much as $10.5M of net worth from the estate tax system without creating ‘Bypass’ or ‘Exemption’ trusts at the death of the first spouse.  To preserve the DSUEA, the surviving spouse does need to timely file an estate tax return.

The ramifications of these changes will impact estate planning for years to come, as the higher exemption reduces how many people will be subject to the estate tax in the future, and portability in particular calls into question the need for a bypass/exemption trust. In fact, bypass/exemption trusts could actually become an adverse strategy for many, given both the direct cash costs of trust drafting and administration, and the indirect income tax consequences of compressed trust income tax brackets during the life of the surviving spouse and the loss of any step-up in basis of assets in the Bypass/Exemption Trust at the death of the surviving spouse.

Nevertheless bypass/exemption trusts will still remain relevant in many situations including their usefulness to shelter future growth from taxation for very high net worth couples and to preserve the GST exemption which is not portable. In addition, use of bypass/exemption trusts in general will remain relevant for many non-tax reasons, especially asset, divorce, and spendthrift protection.  Clients are well advised to undertake a review of their estate plan with their attorney.

And remember, comprehensive estate planning remains a ‘must do’ for all of us.  Regardless of our level of assets or our family situations, an estate plan is needed for addressing incapacity, probate avoidance and appropriate distribution planning to our beneficiaries.  A good estate plan will also reduce the possibility of family fights and address matters such as blended family situations and special needs children.  A comprehensive, updated estate plan remains an important tool for your family and its well-being.

If you want to learn more on the Estate tax Exemption contact us at:

2070 Pioneer Court
San Mateo, CA 94403
Tel 650-572-7933
Fax 650-572-0834

McDowall Cotter provides comprehensive legal services in three areas of practice: civil litigation; business; and wealth preservation. To learn more visit us at https://www.mcdlawyers.net. We are a San Mateo based law firm and for more than 50 years, McDowall Cotter’s chief objective has been to deliver exemplary legal services that are personalized, effective and efficient.