“Portability” is another option for spouses to avoid inheritance tax

The information in this column is intended to provide a general understanding of the law, not legal advice. Readers with legal issues should consult attorneys for advice on their particular situation.

Q: Could you provide an update on the topic of bypass trusts? Our assets are just over $10 million.

A: Under current law, each person enjoys a $5.45 million exemption from federal estate and gift taxes. This amount is indexed to inflation and will increase a little at the beginning of each year. To the extent that a person’s estate exceeds this amount, the excess is taxed at 40%.

If you donate while you are alive, the first $14,000 you give to someone each year is exempt from gift tax, and amounts donated beyond that amount use your lifetime tax exemption. gift tax, which is also equal to $5.45 million per person. . To the extent that you are using your lifetime gift tax exemption, you are also using your lifetime inheritance tax exemption.

Lifetime transfers in excess of $5.45 million are taxed at the same 40% rate that applies to estate tax. This gift tax exemption is also indexed to inflation and will increase with the inheritance tax exemption in future years.

Married couples get two $5.45 million exemptions, one for each spouse, but to take advantage of the full $10.9 million available, certain steps must be taken. The traditional approach was to create a bypass trust, as you mentioned, where the spouse who dies first leaves up to $5.45 million in trust for the other spouse. Such a trust is available to the surviving spouse, but is not affected by inheritance tax when the survivor dies.

Creating a bypass trust still works correctly.

However, there is a new approach called “portability”. Until 2010, if a spouse with a taxable estate died without proper estate planning and left their estate to the surviving spouse, the deceased spouse’s ability to protect assets from estate taxes after the death of both spouses was generally lost.

Even though the gift to the surviving spouse would have generated no estate tax due to the “unlimited spousal deduction”, it meant that the surviving spouse was left with all the assets, but only one person exempt from estate tax. The first-to-die exemption would have been lost had no bypass trust been created.

Now, it’s not always necessary to create a bypass trust because when the first spouse to die leaves assets directly to the survivor, the unused estate exemption can be added to the survivor’s exemption, potentially doubling the amount. that the survivor can give without gift tax for a lifetime and inheritance tax on death.

A bypass trust may still be a better option for many married couples because a trust is protected from creditors and can grow in value over time, while the unused carryover exemption is a fixed amount. Portability is also not ideal for second marriages.

Rather than requiring the creation of a bypass trust in the will, a new preferred approach is to make the bypass trust optional through the use of disclaimers. Nothing is set in stone until the survivor dies, and the survivor can choose between a bypass trust and portability.

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