The surviving spouse of a person who dies after December 31, 2010, may also be eligible to increase the surviving spouse’s exclusion amount by the portion of the predeceased spouse’s exclusion that remained unused at the predeceased spouse’s death (in other words, the exclusion is “portable”). For example, if the predeceased spouse's estate used only $3 million of his or her $5 million exclusion, the surviving spouse's estate would be entitled to an exclusion of $7 million.
However, under the current law, after 2012 the tax rate and tax brackets, the amount of the exclusion, and the law governing these three types of taxes will revert to the law in effect in 2001. Portability of the exemption between spouses for both gift and estate tax purposes also will no longer apply. If you recall, in 2001 the maximum tax rate was 55 percent, and the exclusion for estate and gift tax purposes was a lowly $675,000. The Administration’s proposal would make permanent the estate, GST, and gift tax parameters as they applied during 2009. Thus, the top tax rate would be 45 percent, and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes. The portability of unused estate and gift tax exclusions between spouses would be made permanent. The proposal would be effective for the estates of decedents dying, and for transfers made, after December 31, 2012.
Keep in mind that this is just a proposal. As with every other aspect of the budget proposal, this one will be hotly debated and may look entirely different when the final vote is taken. In the meantime, though, there may be planning opportunities that could be lost if not used prior to the end of this year. For example, if the gift tax exclusion is currently $5 million but reverts to $1 million after December 31, there would be $4 million worth of tax-free gifts forfeited. Likewise, if the current GST exclusion of $5 million is not used before year-end and reverts to $3.5 million, there would be an opportunity loss of $1.5 million.
(Posted February 17, 2012)