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Over the next 10 weeks I want to share some basic tax tips that can be used for year end planning or thinking about your taxes for next year.


Opening up our 10 taxation tips series, I will talk briefly about a little known rule that was passed at the beginning of 2013, as part of the American Tax Relief Act. The rule is called Portability. With the passage of the Act, Congress provided that the amount each person can protect from estate tax remain at 5 million, which amount was allowed to increase each year by the rate of inflation. This means that in 2013 the amount that can be protected by each person from estate tax is 5.25 million. That’s a lot of money and for most Americans they will never have to worry about having an estate tax again. For some people, this idea of portability can be extremely valuable or it may end up being extremely convoluted.

The idea of portability is that as between a husband and wife, or a married gay couple in states that permit gay marriage, if one spouse dies and is unable to obtain the benefit of the full 5.25 million exemption, the surviving spouse may make an election to add the first spouse’s unused exemption amount to their own, thus allowing the couple to get the full benefit of the 10.5 million.

For example. Let’s say a couple’s total assets are 8 million. The first spouse dies. The first spouse will only get 4 million of the 5.25 million they were allowed. In this situation the surviving spouse can elect to take the additional 1.25 million and add it to their own giving him or her 6.5 million. The reason a surviving spouse might want to do this is due to assets that could increase in value over time, the surviving spouse may be substantially younger that the first spouse or the surviving spouse may be expecting an inheritance from parents.

From a planning perspective one might think that drafting documents would become easier, however, with the added layer of strategy whether to use portability, the discussion of the type of document to be drafted actually has become more complicated.

Portability is also affected by re-marriage. If the surviving spouse remarries, then the amount the surviving spouse has available from the first spouse goes away. If the new spouse isn’t able to use as much of the exemption this may be a good thing. In addition, there are some planning considerations regarding making gifts during life and using some of the exemption, getting remarried and then using the next spouse’s exemption.

As you can imagine, the strategies all can be very complicated and require careful thought and analysis in conjunction with an estate planning attorney who is well versed in these laws which is the hallmark of your firm.

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