The Portability Provision

The 2010 Tax Relief Act also includes a provision that allows the estate tax exemption to be transferred between spouses in 2011 or 2012, so that if one spouse dies and does not use the full exemption amount, the remainder can be used by the surviving spouse. This provision was made permanent for 2013 and beyond by the American Taxpayer Relief Act of 2012. To make use of this so-called "portability" option, the executor of the first spouse must actively elect it on the estate tax return, even if no liability is owed. Then, when the remaining spouse dies, the heirs will owe estate tax only on any amount above the combined exemption. For estate planning purposes, this means that husbands and wives do not have to split assets between them, or be concerned about who holds the title on various assets.

Yet, these changes to the estate tax do not eliminate the need for planning. Wealthy taxpayers who currently fall within the exemption limits may still want to consider setting up a bypass trust in anticipation of future changes in the rules. In addition, couples with different sets of final beneficiaries, such as children from previous marriages, may wish to set up a bypass trust in order to clarify the beneficiaries of their separate assets.