Estate Tax Portability

The American Taxpayer Relief Act of 2012 has an important provision that is now permanent after a two-year trial period.  It allows the $5.25 million estate tax exemption of one spouse to be carried forward to the surviving spouse.  In the past the exemption was personal and was lost upon death to the extent it hadn't already been used.  As a result, the Marital Deduction or A-B Trust came into play, whereby the decedent's estate was divided into two portions, one to take advantage of the marital deduction, the other to use the unlimited spousal exemption.

Now, with portability, if the first spouse has an estate under the cap, currently $5.25 million, he can pass that exemption to the surviving spouse, who can then add it to her own $5.25 million exemption for a total of $10.5 million that she can leave tax-free.  Any unused portion of the $5.25 million exemption can similarly be transferred to the surviving spouse.

As Deborah L. Jacobs of Forbes magazine explains in this article, even if no estate tax return is due from the first spouse, the executor must still file an estate tax return, Form 706, in order to preserve the portability.  Failure to do that results in the loss of the first exemption.