What is Portability?
Please note that this trust is not intended to achieve any specific tax benefits.
FEDERAL ESTATE TAX EXEMPTION AMOUNTS
Most people do not have to worry about estate tax issues. New tax legislation that took effect on January 1, 2018 increased the federal estate, gift and generation-skipping transfer tax exemption to $11,200,000 for an individual and $22,400,000 for married couples. Those amounts increase each year to reflect the rate of inflation until 2025 when the law sunsets. That means that if your estate is worth more than that exemption amount you need to consult a tax professional and possibly make revisions to your trust. On the other hand, what this means for most people is that there is absolutely no estate tax on your estate and no need to worry about having to avoid estate taxes for those with assets under those limits. However, in 2025 the law could revert back to the old thresholds, but even those numbers were about 50% of the new numbers listed above, so again most people would not be subject to estate tax.
PORTABILITY – FILING THE ESTATE TAX RETURN UPON DEATH OF A SPOUSE
Changes in the estate tax law in 2009 has made trust administration easier and therefore trust agreements more user friendly. Under the old law, each spouse had their own exemption to estate tax, and when one spouse died their exemption amount died with them. So, attorneys would draft BYPASS TRUSTS also called AB TRUSTS to preserve the deceased spouse’s exemption. The downside to that was it is expensive to have to administer this type of trust since you had to actually separate your assets at the time death. The new law allows the exemption of the deceased spouse to be carried over to the surviving spouse so that the estate still enjoys the full marital exemption, which is called “portability”. This election must be made
within 9 months after death of the first spouse (but you can get an additional 6 months if you request an extension) by filing an estate tax return at the time of death. Note that there are simplified valuation provisions that apply for those estates that do not have a filing requirement and also note that most of us do not even need to use the portability election since even as a single individual, the estate tax exemption amount is large enough to avoid all estate taxes anyway.
You can find detailed information at https://www.irs.gov/instructions/i706/ch01.html.
Tax laws change over time and this trust is meant to last for years. Therefore, keep in mind the need to watch out for changes in the inheritance laws or large beneficial changes in your estate that may prompt you to review the need to update your trust.
Call Tony Bayard de Volo, Esq. at 408-288-5431 for a free consultation. www.vololaw.com - San Jose, California.