The Real Deal With the Estate Tax Ememption

The Federal Estate tax exemption for 2011-2012 is $5,000,000 per spouse.  Under previous law, in order to take advantage of both spouses exemptions, there needed to be proactive planning to take advantage of both exemptions.  This was often done through a testamentary trust being established by way of a will, or setting up a credit shelter trust during your lifetime.  This way both $5,000,000 exemptions would be passed to the next generation federal estate tax free (MA however has it's own state estate tax- see below).

      However, the new tax law signed by President Obama on Dec. 17 contained a great tax break for married couples.  Beginning January 1st, 2011 surviving spouses can add the unused portion of a deceased spouse's exemption to their own estate tax exemption and there is no need to have potentially expensive trusts.  So, for example, if one spouse dies, and leaves a taxable estate of $3.5 million, the "unused" balance of the deceased spouse's $5 million exemption is transferred to the surviving spouse for use at a later time. 

     How to do This-  To "port" a deceased spouse's exemption to the surviving spouse, the executor of the first deceased spouse's estate must file a federal estate tax return and make an election to allocate the unused exemption to the surviving spouse.
      The only catch with the new law is that, so far, portability is only available for two years - 2011 and 2012. It would be a wonderful thing is this portability feature was made permanent but for now we will just have to wait and see.

     Massachusetts has it's own Estate Tax Bite-  MA has an estate tax exemption of $1,000,000 per household.  So in this case anything over the $1MM threshold will be subject to MA estate taxes.  So if the gross estate of both spouses of $2,000,000 for example, taxes would be owed on the whole amount.  The tax rate is a progressive one that maxes out at 16%.