The Portability Provision

In the years after The American Taxpayer Relief Act of 2012, the estate tax exemption can be transferred between spouses, so if one spouse dies and does not use the full exemption amount, the remainder can be used by the survivor. To make use of the “portability” option, the executor of the first spouse must actively elect it on the estate tax return, even if no liability is owed. Then, when the remaining spouse dies, the heirs will owe estate tax only on any amount above the combined exemption. This means that husbands and wives do not have to split assets between them, or be concerned about who holds the title on various assets.

Yet, this does not eliminate the need for planning. Wealthy taxpayers who currently fall within the exemption limits may still want to consider setting up a bypass trust in anticipation of future changes in the rules. In addition, couples with different sets of final beneficiaries, such as children from previous marriages, may wish to set up a bypass trust in order to clarify the beneficiaries of their separate assets. See chart on page 31 for more information about commonly used trusts.