Portability & Gifting

I recently wrote about portability, specifically, what it is and how to elect it.  This post takes it one step further, discussing how portability and gifting interact.

Sunset

The 2010 Tax Relief Act provides temporary relief as it only applies to the estates of decedent’s dying in calendar years 2011 and 2012.  Therefore, the current portability rule is set to sunset relatively soon. Additionally, it is only applicable if both spouse’s die after December 31, 2010, and before January 1, 2013.  It is unclear at this point what will happen to portability and the other provisions of the 2010 Tax Relief Act after 2012.  The President’s 2012 budget proposal (released February 2011) included portability as a permanent feature, although I would not (and am not) relying on this in planning with my clients.

Gifting

The portability feature of the 2010 Tax Relief Act permits a surviving spouse to utilize a deceased spouse’s unused exemption amount.  The unused exemption could be used by the surviving spouse to offset gift or estate taxes.  Note that portability does not increase the surviving spouse’s generation-skipping transfer tax exemption.

Given the uncertainty of whether or not portability will become a permanent feature, a surviving spouse with a large estate may want to consider using a deceased spouse’s unused exemption to make lifetime gifts during 2011 or 2012.  If portability is terminated following 2012, any remaining balance of a surviving spouse’s deceased spouse’s unused exemption will likely be lost permanently.

If portability is terminated, it is possible that Congress would require recapture, upon a surviving spouse’s post-2012 death, of any tax benefits realized by the surviving spouse’s use of the deceased spouse’s unused exemption amount. Although this uncertainty may dissuade some from utilizing portability, there are potential benefits.  For example, a surviving spouse’s gift tax use of a deceased spouse’s unused exemption may result in greater estate taxes at his/her death if recapture is required, however, such lifetime transfers would still remove any post-gift appreciation and income generated by the asset from the second spouse’s estate on his/her death.  This can be a particularly advantageous planning technique.

Portability is a new and complex topic; therefore, it is imperative to speak with an estate planning attorney and/or CPA regarding the advantages and disadvantages of portability.