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August 19, 2011 at 08:00 PM
PHILADELPHIA — The estate tax portability provision in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 could trip up advisors who fail to think ahead.
Kathleen Sherby, a partner at Bryan Cave L.L.P., St. Louis, talked about the Tax Relief Act provision here earlier this week at a clinic organized by the Society of Financial Service Professionals (FSP), Newtown Square, Pa.
“Portability sounds like a great thing,” Sherby said at a wide-ranging closing general session. “But there are problems.”
The Tax Relief Act is on track to cause many provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) to expire, or “sunset,” at the end of 2012,
The Tax Relief Act portability feature lets a surviving spouse take advantage of the unused estate tax exemption left behind by the spouse who dies first. The surviving spouse must file an estate tax return to capture the unused exemption. Like other EGTTRA provisions extended by the Tax Relief Act, that provision could sunset at the end of 2012.
One of the problems with the exemption portability provision is that it is not indexed to inflation, Sherby warned.
“So–10 or 20 years later–you get whatever the unused exemption amount is,” she said. “If the assets of a surviving spouse grow considerably, the exemption might not cover the individual.”
Another problem is that a surviving spouse might not be able to use the exemption after remarrying.
Suppose an advisor has a client who is a surivivng spouse and a user of the Tax Relief Act exemption portability provision. The client remarries. The client’s second spouse uses up all of his or her estate tax exemption amount and then dies. In that situation, the unused exemption of the deceased spouse from the client’s first marriage is no longer available to the client. That’s because the portability feature applies only to the last deceased spouse’s unused exclusion amount.
“If you marry someone who is a lot richer than your first spouse, and that spouse dies before you do, you lose the benefit of your first spouse’s unused exemption,” Sherby said. “And you now have the wealthy second spouse’s unused exemption–which may be nothing.
“So if you have a poor spouse who predeceases you, you may not want to marry a rich spouse. Instead, you might simply choose to live together. Or you get married and make lifetime gifts of the unused exclusion amount.”
Lawrence Brody, Sherby’s co-presenter and fellow partner at Bryan Cave, joked that enterprising individuals who plan to remarry now have an unconventional commercial opportunity: Advertising an unused exemption in a classified ad on the Web.
“Here’s my proposed heading: ‘Old, Poor, Unhealthy Widower: Full Exemption Available,’” Brody said. “‘At a reasonable cost, my exemption is available to you. Here’s my contact info…’”
Sherby pointed to other problems with the 2010 tax law provision.
