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"What is 'Portability of the Deceased Spouse's Unused Exclusion Amount' (and do you still need a Bypass Trust)?"

 

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Estate Planning Update
September 2011
Greetings!
 
Last December, Congress enacted the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This Act included a temporary revision of the laws governing the federal estate, gift and generation skipping transfer (GST) taxes (collectively called "wealth transfer taxes"). One of the new laws implemented "portability of the deceased spouse's unused exclusion amount (DSUEA)."
 
What is "Portability of the DSUEA?"

 

The "deceased spouse" is the first spouse to die; and the "surviving spouse" is the second one to die.

   

Each of us may make a certain cumulative amount of taxable gifts, during lifetime and at death, without owing any transfer tax because these gifts are covered by our "exclusion amount." In 2011 and 2012, the exclusion amount is $5M; and wealth transfers in excess of $5M are taxed at 35%. However, the exclusion amount is scheduled to drop to only $1M on January 1, 2013; and then, wealth transfers in excess of $1M will be taxed at 55%.

   

Prior to enactment of the Tax Act of 2010, if a married person died without using all of his or her exclusion amount, the unused portion - now known as the DSUEA - was wasted. However, it was not wasted if a Bypass Trust (or Credit Shelter Trust) was funded with this amount, typically for the lifetime benefit of the surviving spouse with the remaining assets passing to their children or other beneficiaries.

   

Under the new law, the DSUEA for gift and estate tax purposes may be transferred to the surviving spouse. For example, if a married man who never made any taxable gifts dies in 2011 or 2012, his unused exclusion amount may be transferred to his widow, who would then be able to make up to $10M in taxable gifts without paying any gift or estate tax, provided that she has not remarried and she dies by the end of 2012. Please note that the DSUEA for GST purposes is not portable.

 

Do You Still Need A Bypass Trust? 
 
Portability of the DSUEA is available only if an estate tax return is filed for the deceased spouse's estate and the necessary election is made on the return before its due date. However, a grief-stricken surviving spouse might forget to file the return on time; and consequently, his or her estate may pay significant estate taxes that would have been avoided if a Bypass Trust had been used.
 
Portability of the DSUEA is scheduled to expire at the end of 2012. Thus, if (i) Congress does not extend the law, (ii) the surviving spouse dies after the law sunsets, and (iii) the deceased spouse's estate does not fund a Bypass Trust, the surviving spouse's estate may pay significant estate taxes that would have been avoided if a Bypass Trust had been used.
 
Assets held in a Bypass Trust may be protected from creditors of the surviving spouse and the couple's children, including ex-spouses, if the trust is structured properly.
 
Assets held in a Bypass Trust may be managed by a capable trustee for the benefit of the surviving spouse and the couple's children, who may not be prepared to manage them on their own.
 
A Bypass Trust allows a deceased spouse to provide for the financial needs of the surviving spouse, while providing that any assets remaining in the trust on the second death will be distributed to beneficiaries chosen by the deceased spouse. In other words, a Bypass Trust may be used to insure that the surviving spouse cannot re-direct the trust remainder to children of a subsequent marriage, etc.

Please contact me at 323.654.9513 or brookspaley@paleylaw.com if you would like to discuss your current estate plan.

Brooks Paley, J.D., LL.M.
About Paley Law Corporation
Brooks 0168

Paley Law Corporation is based in Los Angeles and specializes in providing personalized, sophisticated estate planning and related legal services. Brooks Paley, J.D., LL.M., is the managing principal of Paley Law. Brooks is quoted in the June/July 2011 issue of Working Ranch Magazine ("Death Tax Tips") on the impact of the estate tax on family-owned businesses and tax planning opportunities available to them.

The above material is provided for general informational purposes only and is not intended to constitute legal advice in any particular matter. Transmission of this material does not create an attorney-client relationship. Paley Law Corporation does not warrant the content of this material and is not responsible for any errors or omissions associated with it.

To ensure compliance with requirements imposed by the Internal Revenue Service, Paley Law Corporation informs you that any U.S. tax advice contained in this communication (including any links to other websites or material) is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

    

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2011 Paley Law Corporation