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By Christine Benz | 01-09-2013 11:00 AM

Portability Provision Simplifies Couples' Estate Planning

Estate-planning expert Deborah Jacobs details how spouses can take advantage of the 'portability' tax provision, which allows them to maximize both partners' estate tax exclusion, and how this strategy differs from trusts.

Note to readers: This video originally posted on Jan. 24, 2013. We are refeaturing it as part of Morningstar.com's Tax-Relief Week 2013.

Christine Benz: Hi. I am Christine Benz for Morningstar.com. The recently enacted tax package has implications for spouses inheriting assets from one another. Joining me to discuss this topic is estate-planning expert, Deborah Jacobs.

Deborah, thank you so much for being here.

Deborah Jacobs: Thank you for having me.

Benz: Spouses inheriting assets from one another have long been able to take advantage of the marital deduction. Let's talk about what that is, Deborah, and also talk about whether this new tax package that passed through Congress will maintain that marital deduction?

Jacobs: The unlimited marital deduction allows spouses to pass an unlimited amount to each other tax-free, provided that the spouse inheriting is a U.S. citizen. And what happens then is that there is no tax on assets going to that spouse, whether they pass outright or in a special kind of trust, but there is tax on those assets when the second of them dies.

The new tax law did nothing that changes that, it just makes things a little bit better by extending a provision that became part of the tax law for the first time two years ago, and that was set to expire along with everything else at the end of 2012. This provision is called portability; that's not a term that appears in the tax code.

Here is what it means. Portability means that the surviving spouse can add to their own $5 million a tax-free amount whatever portion of the spouse who just died, whatever portion of their tax-free amount was not used during lifetime gifts. So, what this means is that couples together can transfer during life or when they die a total of $10 million-plus. And the reason I keep saying "plus" is the tax law says $5 million, but it's adjustable for inflation. So, in 2012 it was adjusted to $5.12 million apiece for a total of $10.24 million together. We are expecting another inflation adjustment in 2013 though the Internal Revenue Service has not yet announced it.

Benz: This is obviously good news for very affluent couples, maybe not such a big deal for people who aren't so affluent, but you note that even for people who want to take advantage of this portability provision, you still need to take some steps to make it work for you. Let's talk about how that would work if, in fact, you want to take advantage of this portability.

Jacobs: Yes, portability is not automatic. In order to get portability, the surviving spouse must file an estate tax return even if no tax is due. And what this means is that a lot of people who don't think they have to worry about estate taxes are going to have to be aware that they must file this return anyway. I am hoping that the IRS is going to develop a short form for this so that people could even fill it out themselves the way some people do their own income tax returns and perhaps create consumer-oriented software for this as well down the line.

But the important thing to keep in mind right now, and I'm kind of on a public-service campaign about this--I have been for the last two years because I expected this provision to be extended--was you have to know there is this thing called portability and that's not likely to cross your radar screen on an annual basis the way income taxes and other sorts of taxes do. It's a sort of for most people a once-in-a-lifetime kind of a thing or maybe twice-in-a-lifetime, but it's not the sort of thing we think about all the time. You need to know there is such a thing as portability and you need to be aware that you must file an estate tax return in order to carry over this unused amount.

I would encourage everyone to file the estate tax return, electing--that's the word--electing portability even if they don't think they are ever going to have a use for it because what if you win the lottery or what if you sell your business and have a sudden windfall or what if you become rich through investments, you just never know. So, why not be optimistic about it?

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