(Bloomberg News) Wealthy individuals in the U.S. will find it easier to cut their estate-tax bill as a result of a provision for using their deceased spouses' exemption credit.
Everybody has a gift and estate-tax exemption of up to $5 million this year and next. For people who died after Dec. 31, 2010, any unused portion of that can now be passed by the estate to the surviving spouse, according to tax legislation enacted by Congress in December. Before that law, couples set up specialized trusts and had to be sure their assets were divided up in a certain way.
"It's something that can help someone caught dying before they did any planning, but certainly shouldn't be something you count on," according to John Olivieri, a partner in the private clients group in the New York office of White & Case LLP.
The $5 million exemption covers gifts made while alive as well as after death. For example, if a married man died this year and left his $2 million estate to his children and had made a $1 million lifetime gift, he would have a $2 million exemption that was unused. The portability provision would allow his widow to take advantage of that $2 million exemption and add that to her $5 million exemption, and give away up to $7 million free of federal gift and estate taxes if she dies before 2013.
There are 3,300 estates in the U.S. that would owe federal estate taxes under the current threshold of $5 million, according to estimates from the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, two Washington research groups.
Bypass Trusts
Portability will expire and the estate tax will switch to a top rate of 55 percent instead of 35 percent and the exemption will fall to $1 million as of Jan. 1, 2013, unless Congress acts. The deficit reduction legislation enacted Aug. 2 calls for reducing the deficit by at least $2.1 trillion over 10 years.
Before this year, taxpayers would prepare wills that included so-called bypass or credit-shelter trusts to preserve exemption amounts when they died, and passed the rest of their assets to their surviving spouses upon death. Gifts to spouses who are U.S. citizens during life or upon death generally aren't taxed under the Internal Revenue Service's rules.
Upon the death of one spouse, couples would put up to the exemption amount in a trust, which would be structured to allow distributions to the surviving spouse, Olivieri said. When the second spouse died, the assets in the trust would pass tax-free to the heirs because they're outside the estate.
'Safety Valve'