(Dow Jones) A new tax break for spouses wealthy enough to worry about the estate tax seems to offer a huge benefit, but isn't perhaps as special as it seems at first glance.
When Congress approved a two-year extension of tax cuts dating back to the Bush presidency, it also let married people pool their estate tax exemptions, under rules known as portability.
Now, a surviving spouse can take his or her own $5 million estate tax exemption along with any of the $5 million not used by the deceased partner. An exemption could not be shared in the past.
The change has spurred a lot of talk among the wealthy, according to Lauren Y. Detzel, chairman of the estate and succession-planning department at Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth. The question for some: Is portability a good reason to undo estate plans already in place?
The answer to that is a definitive "no," Detzel says. "Educating clients about the 'pitfalls' of portability is a top priority," she adds.
Under portability, if a husband dies in 2011 or 2012, having made $2 million in lifetime gifts, and leaves his whole $8 million estate to his wife, no tax is due at his death. Adam J. Wiensch, an estate planning attorney, and partner at Foley & Lardner LLP in Milwaukee, offers the example, adding that the wife can use his $3 million unused estate tax exclusion which, coupled with her own $5 million exemption, raises the threshold to $8 million.
There are several reasons not to simply rely on portability, but to plan instead for what to do with the part of the estate held by the first spouse to die.
First of all, the rules are in effect for two years only.
Another problem is that relying on portability does nothing to address asset appreciation and or credit protection. A person who sets up a trust to hold the $5 million exemption for one or both spouses, instead of just relying on portability, clears the whole amount, plus appreciation and income on the assets, off the estate. And, the credit protection a trust can afford is often very important these days.
The kind of trust often used for this purpose is a credit shelter trust, otherwise known as a bypass trust or family trust.