Attorney & Mediator
Attorney & Mediator

Estate Tax and Portability – What is it?

Now that Congress has acted, we know that each of us has a $5.25 Million exempt amount to transfer during our lifetimes or at death before our estates are hit with the estate tax.

If married, that means that the two individuals together get $10.5 Million to transfer.

So, what is portability?  It is a provision in the estate tax law that allows couples to take advantage of each other’s exemption, even if they do not have credit shelter trusts.

An example is this: If husband and wife have $7 Million in assets.  The first to die leaves all of the assets to the survivor.  At the death of the first to die, there is no estate tax as transfers between spouses are not taxed.

When the survivor dies, there is now $7 Million in assets.  Since the exempt amount is $5.25 Million, there would be $1.75 Million that would be taxable.  However, if upon the death of the first spouse, the Personal Representative transferred the deceased spouse’s unused $5.25 Million federal estate tax exemption to the surviving spouse, that surviving spouse would now have $10.5 Million in estate tax exemption available.  As a result, the estate of $7 Million would pass to the heirs without the imposition of estate tax.

First, remember that this portability of the exempt amount only applies to spouses.  Therefore, a single individual ‘s estate cannot transfer the federal estate tax exemption to a child or other family member.

Next, this does not assist when the assets appreciate.  If high net worth clients place their assets in a credit shelter trust, the exempt amount for the deceased spouse is held in trust and remains exempt, even if it appreciates.  Not so if the individuals are relying on portability.

Finally, timing is everything. To take advantage of this option or to “elect portability” the Personal Representative handling the estate of the spouse who died must file an estate tax return (Internal Revenue Service Form 706), even if no tax is due. This return is due nine months after death with a six‑month extension allowed.

Estate Tax and the Fiscal Cliff?

While we were getting dangerously close to flying over the fiscal cliff, those in the estate planning sector were watching closely.

The estate and gift tax, which taxes what you own and pass on to others either during your lifetime as a gift, or at death as a bequest, was in flux.  At the end of 2012, the tax which gave every individual a $5 Million exempt amount prior to the imposition of tax, was in danger of reverting to $1 Million per person.  Additionally, the tax rate would have gone up to 55%.

Many may think that $1 Million is a sufficiently generous amount.  However, it would have had adverse affects upon many family owned businesses and farms.  These individuals don’t live like the wealthy, however, the value of their businesses or farms, which include all of their equipment, would have placed their estates over $1 Million.  In such an instance, the family would then, upon the death of the owner, have to sell the business or farm because they did not have enough money to pay the estate taxes due.

In the end, lawmakers preserved the $5 Million exempt amount per person but did change the tax rate from a maximum of 35% to 40% on the amounts over the exempt amount.

So, who’s estate is now taxable?  For taxpayers dying in 2013, the estate tax exclusion amount as adjusted for inflation is now $5.25 Million per person.  For all amounts over that, the estate tax will be levied at a maximum rate of 40%.

What happens to my children if I don’t have a Will?

If something untimely and unanticipated happens to the parents of minor children, what happens next?

The Probate Court must appoint a Guardian and a Conservator for the children that will serve until the children are 18 years old.   This will be done without any guidance from the deceased parents.

A Petition for Appointment of a Guardian will be filed in the Probate Court by an individual wanting to serve in that capacity.  If multiple parties think it should be them, then there will be a hearing in front of the Probate Judge who will then make a decision. 

This is necessary as children must have care givers and people who will serve in a parental capacity to raise them.  It is also unfortunate as the Probate Judge will have little information upon which to make a decision.

The relatives who show up will presumably do so in nice clothes and using nice manners.  They will all “look good”.  The judge will have no idea as to the feelings of the now deceased parents. 

What if she didn’t like the way she was raised?  If her parents were too detached?  Too strict?

What if he doesn’t like the way his brother lives? Too lazy?  Too driven?

In the end, the judge will make the best decision that he or she can make with the information that is presented.

Don’t leave your children’s fate in the hands of a judge who doesn’t know you.  Plan.  Get a Will done and nominate those individuals that you would want to raise your children. 

Second Marriages – Who will pay for Long Term Care?

It comes as a surprise to many couples who are looking at re-marriage later in life.  They discuss their finances, make decisions as to estate planning, make decisions concerning the payment of current expenses.  They decide to execute a Pre-nuptial Agreement to set forth all of their agreements.

They want to agree that if one becomes ill and requires nursing home or long term skilled nursing care, the other will not be required to pay for it.  They want this provision in their Pre-nuptial Agreement.

What affect will such a provision have?  Will it be binding?  NO

While the individuals can agree in writing that they will not have any responsibility for the other’s long term care costs, Medicaid rules do not see it that way.

When applying for Medicaid for long term care, a snap-shot of the couple’s assets are looked at – his and hers.  All assets are counted toward paying for the nursing home resident’s care.  Medicaid does not honor Pre-Nuptial Agreements and it is not bound by the provisions in such an agreement.

This is a significant issue for couples. While they can specify who pays for what while they are married and can agree upon an inheritance for one another and for their children, they are unable to control the cost of long term care for themselves or one another.

For couples concerned with this issue, I recommend seeing a long term care insurance specialist to determine if the parties are eligible for insurance (given their age and medical condition) and whether the insurance coverage is affordable. 

In some cases, when unable to obtain insurance, some couples have decided against getting married in order to shelter their own assets from the possibility of paying for the other’s health care needs.