Estate Planning – Portability Provisions of TRA 2010


The “Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010” was enacted December 17, 2010 and is referred to as “TRA 2010.” For calendar years 2011 and 2012, TRA 2010 reunified the estate, gift and generation-skipping taxes with a $5 million exemption and a 35% tax rate. The $5 million exemption will be indexed for inflation in calendar year 2012 only. If Congress fails to enact additional legislation by December 31, 2012, the taxes will remain unified but will be reduced to an inflation-adjusted $1 million exemption and increased to a 55% maximum tax rate.

Until TRA 2010 was enacted, married couples typically implemented a two-trust estate plan to take advantage of each spouse’s estate tax exemption. When the first spouse passed away, a credit-shelter trust would be funded first with an amount up to the deceased spouse’s estate tax exemption. A marital trust qualifying for the marital deduction would be funded if the value of the deceased spouse’s assets exceeded the estate tax exemption thereby deferring the payment of any estate tax. When the surviving spouse subsequently died, the combined value of the assets in the deceased spouse’s marital trust and the surviving spouse’s assets would be subject to the estate tax only to the extent it exceeded the surviving spouse’s estate tax exemption. The assets in the credit-shelter trust would not be subject to estate tax when the surviving spouse died, no matter how much the assets grew in value. Most importantly, in the event the estate tax exemption of the spouse who died first was not fully utilized when he died, i.e. the credit-shelter trust was not fully funded with assets having a value equal to the estate tax exemption, the unused amount of the deceased spouse’s estate tax exemption was lost. The worst outcome for clients who failed to implement an estate plan designed to reduce their exposure to the estate tax was that the estate tax exemption of the spouse who died first was totally lost, and the surviving spouse only had her remaining estate tax exemption to use when she died.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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