In 2011, Congress introduced a tentative tax planning device that eventually became a permanent part of the tax code due to an act passed in 2012. Dubbed "portability" by tax agents, the new law could provide for some big tax savings if correctly implemented in an estate plan.
Basically, portability allows a widow or widower to use the estate tax exemptions of a recently deceased spouse for their own estate tax purposes when they die. The sum that's carried over from the deceased spouse to his or her surviving spouse is referred to as the DSUE, which stands for "deceased spousal unused exclusion amount." Currently, a married spouse can transfer up to $5.34 million without being subject to taxes.
Many tax agents refer to this process as "electing portability." It's important to be aware that an estate's executor can only elect portability if they've filed a tax return for the estate within nine months after the person's death. A six-month extension might be granted for this process, but either way, a return must be filed - regardless of whether or not any tax is actually owed.
Before the law was passed, the second spouse to die would essentially lose the first spouse's tax exemption if proper estate planning had not taken place. Before portability, there were options for solving this problem. Many of these options involved establishing what is known as bypasses or credit shelter trusts. Portability eliminates the need for these go-arounds in many cases.
Despite the new law, however, some tax experts still recommend using the older planning tools. For example, one attorney recommended using things such as bypass trusts if there's any suspicion that a creditor or disgruntled spouse may end up suing a person's heirs. He also suggested that the older methods might be appropriate for people that wish to leave large sums of money to their grandchildren.
The taxes involved in any estate plan can become complicated. Staying abreast of the tax law changes in Colorado and at the national level is necessary for anyone that wishes to leave their heirs with the best possible financial situation. A qualified attorney can help a person decide whether electing portability or using a bypass trust would be best.
Source: forbes.com, "Estate Planning For The 99%" Deborah L. Jacobs, Jan. 19, 2014