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Marriage and estate taxes: the concept of portability

The oft-repeated saying about the inevitability of death and taxes is a commonplace in our culture. There is no corresponding quotation for marriage and taxes.

But marriage does carry significant tax implications. We've occasionally touched on those in this blog, such as the issue of how same-sex marriage recognition impacts state income taxes. We wrote about that in our April 21 post last year.

Today we will take note of newly issued IRS regulations regarding estate- and gift-tax exemptions for married couples. In one word, these regulations concern something called "portability" - a concept we will explain in this post.

Since 1981, the U.S. tax code has permitted spouses to leave property to each other without paying federal estate tax. When the first spouse dies, the assets pass to the other without Uncle Sam getting any of it.

But what about when the second spouse dies? Prior to 2010, tax planners had to contend with the fact that, for the surviving spouse, there was only one estate-tax exemption left to use, not two, when passing property along to heirs.

To be sure, the loss of the second exemption could be dealt with by creating sophisticated trusts. But doing so requires a clear commitment to tax planning that many people do not possess.

In 2010, Congress stepped into this situation by making the estate-tax exemption "portable" between spouses. If the spouse who died did not use all of his or her gift- and -estate tax exemption, the spouse who survives may do so.

But in order for the exemption to be portable, the executor of the spouse who died must affirmatively choose this option on the federal estate-tax return. And, under the newly issued rules, the estate-tax return must be filed within nine months of the first spouse's death.

In 2015, the federal estate-tax exemption is $5.43 million per individual. This means that a surviving spouse who chooses portability of the exemption and complies with the rules could leave nearly $11 million to heirs without any federal tax bite.

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