Times Two

At the last hour of 2012, Congress made a decision to make permanent the estate tax exclusion amount to $5.12 million (indexed for inflation) and a gift tax rate of 40 percent. Also made permanent was the “portability” of personal exclusions between spouses introduced in 2010. Many, thinking it would get reversed, haven’t paid much attention to it. Now that it is permanent we all may be more interested in how it works. Okay, the IRS gives each individual an amount (personal exclusion) that they can give away, to persons other than their spouse, during their life or at death without facing gift tax. Let’s assume that Bob dies this year, leaving a $7M estate. He leaves $6M to his wife, Mary, and $1M to their children. Bequests to a legal spouse (U.S. citizen) are estate tax-free, no matter how large. The $1M going to the children is sheltered by Bob’s personal estate tax exclusion. Therefore, Bob’s estate owes no federal estate tax. Now, suppose that Mary dies next year. Her estate will go to their children. Mary’s estate can use up her $5M personal exclusion plus the $4M of Bob’s exclusion that he didn’t use. This will come in handy because after adding Bob’s $6M to her $3M of personal assets, her $9M estate will be shielded from estate tax. The biggest advantage of portability is that it can permit married couples to reduce the expense and complexity of estate planning. However, for the high net worth individual, there are still very good reasons to have trusts in place and those reasons should be explored with proper diligence.

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