Tax laws passed by Congress made significant estate tax changes for 2011 and 2012. Although the laws are temporary, one should adjust their estate plan appropriately to take advantage of the higher limits.
One of the new laws allows each individual the opportunity to transfer up to $5 million during life or at death to our children or other heirs, tax-free. The law still allows one to give an unlimited amount to your spouse, during life or through your estate plan (U.S. citizenship required) with no tax bill due.
Starting this year, a surviving spouse can add any unused estate tax exclusion of the spouse who has just died to his or her own $5 million exclusion. This change enables spouses together to transfer up to $10 million tax-free. This new spousal portability applies only to deaths in 2011 and 2012. It will expire, as will the $5 million exclusion, on Dec. 31, 2012, if Congress doesn't act before then.
Starting in 2011 it is possible to use the $5 million exclusion to transfer assets through gifts during your life, at death, or through a combination of the two. For example, if you have used $1 million of the exclusion to make taxable lifetime gifts, the unused exclusion when you die will be $4 million, rather than $5 million.
Portability is not automatic and can pose problems if not executed properly. The personal representative (PR) handling the estate of the spouse who died needs to transfer the unused exemption to the survivor. This is done by filing an estate tax return when the first spouse dies, even if no tax is owed. The return is due nine months after death with a six-month extension allowed. If the PR doesn't file the return or misses the deadline, the surviving spouse loses the right to portability.
