Portability of the Estate Tax Exclusion Amount

When loved ones pass away there are many decisions to be made.  If the value of the decedent’s gross estate is under the current $5 million estate tax exclusion, most executors choose not to file an estate tax return.  However, under existing law, executors should consider filing an estate tax return to take advantage of the “portability” of the estate tax exclusion amount for decedents who are survived by a spouse.

For the estate of a decedent dying after December 31, 2010 who is survived by a spouse, a portability election is available that allows the surviving spouse to apply the decedent’s unused estate tax exclusion to the surviving spouse.  The deceased spousal unused exclusion (or “DSUE”) can only be applied to the surviving spouse by filing an estate tax return, Form 706, for the deceased spouse. 

The Form 706 must be timely filed (including extensions).   A portability election is made by filing an estate tax return and does not require an affirmative statement or box to check. 

The surviving spouse’s basic exclusion amount, currently at $5 million, is combined with the deceased spouse’s unused exclusion amount (DSUEA).  The new total exclusion amount for the surviving spouse can be used for lifetime taxable transfers (gifts) or at death.  Please note that if a surviving spouse remarries, the DSUEA from the first spouse is lost. 

Below is an example to understand the topic better.

After a prosperous life, Angelina dies in 2011.  Angelina has made lifetime gifts of $2 million and has no taxable estate.  The executor of Angelina's estate files Form 706 and elects to apply Angelina's deceased spousal unused exclusion amount (DSUEA) to Brad (the surviving spouse).  Brad has made no taxable lifetime gifts.  Brad's new applicable exclusion amount is $8 million ($5 million basic exclusion amount plus $3 million from Angelina's unused exclusion amount) which he can use against lifetime gifts in memory of his late wife or for transfers at his death.

There are many factors to consider before considering the portability election, including the traditional credit shelter trust and the unlimited marital deduction.  Please discuss your estate plan with your tax preparer, keeping in mind that the current law is in effect through the end of 2012.

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Melissa Hansen is a Certified Public Accountant at Nasif, Hicks, Harris & Co., LLP.  Melissa can be reached via phone at (805) 963-5106 or e-mail at mhansen@nhhco.com.

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The material appearing in this communication is for informational purposes only and should not be construed as an opinion or legal, accounting, or tax advice provided by Nasif, Hicks, Harris & Co., LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Nasif, Hicks, Harris & Co., LLP assumes no obligations to provide notification of changes in tax laws or other factors that could affect the information provided. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. The user assumes all responsibility for the use of such information. Any written tax advice contained herein was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code or any taxing authority.

December is the Best Month to Save on Taxes

In the tax preparer world December is known as tax planning month. As a CPA this is my favorite month because it is the month I can help save the most money for my clients.

I love my job most when I effectively use the tax code to my client’s advantage. Tax planning allows clients to save money.

Here are great tax planning strategies I employ to help my clients:

Charitable Giving

The holidays are a great time to give back to your favorite charity by making a donation of old clothing or miscellaneous personal property. Charitable donations may increase a taxpayer’s itemized deductions.

Gifts to Loved Ones

In 2011 you can gift up to $13,000 per person without filing gift tax returns or paying gift taxes. The lifetime gift and estate exclusion is currently $5 million. The lifetime exclusion amount may change at the end of 2012 as the current tax laws are set to expire on December 31, 2012.

Roth IRA Conversions

In 2010 and 2011 you can convert an unlimited amount from your 401(k), SEP IRA, Traditional IRA and other retirement accounts into a Roth 401(k) or IRA. You have to pay tax on the amount converted but if you have a low income year or unused itemized deductions, a Roth conversion may be a great way to let your retirement funds grow income tax free.

Timing of California and Real Property Tax Payments

In general, state income and property taxes that are deductible as an itemized deduction. By working with your tax preparer you can determine if paying more of the taxes in the current year versus in the next year will save you money. For individuals that have fluctuating income this strategy is especially effective.

Update your Trust and Estate Planning Documents

Your trust and estate plan may be the most important item when you are planning for your heirs. December is a great time to meet with your estate planning attorney and accountant to update your plan documents for any changes that have occurred. Trusts are easy to forget when you do not need them, but are vital when you do.

If you do not have a an estate plan, we highly recommend you meet with a local estate planning attorney and accountant so your family does not encounter delays in settling your estate.

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Joe Bishop is a Certified Public Accountant at Nasif, Hicks, Harris and Co., LLP. Joe can be reached via phone at (805) 979-9383 or via email at JBishop@nhhco.com.

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The material appearing in this communication is for informational purposes only and should not be construed as an opinion or legal, accounting, or tax advice provided by Nasif, Hicks, Harris & Co., LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Nasif, Hicks, Harris & Co., LLP assumes no obligations to provide notification of changes in tax laws or other factors that could affect the information provided. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. The user assumes all responsibility for the use of such information. Any written tax advice contained herein was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code or any taxing authority.