Estate Tax Portability – Nothing is Easy


In 1997 a person could pass $600,000 ($1,200,000 per couple) estate tax free. For many, the threat of estate tax was real. Because of this, most estate plans for married couples contain a “bypass trust.” The bypass trust holds the property of the first spouse to die, and its property is not subject to estate tax at the death of the surviving spouse. Also, if the deceased spouse did not use all of his or her estate tax exemption, no portion could be later used by the surviving spouse. However, in 2014, a decedent can pass $5,340,000 estate tax free (indexed for inflation). In addition, if the deceased spouse does not use all of his or her exemption, the unused portion can be transferred to the surviving spouse for later use. This is often referred to as “portability”.

Couples with less than $10,680,000 no longer need the bypass trust to avoid estate tax. In addition to simplicity, there is another important advantage to eliminating the bypass trust. Under the income tax rules, heirs are deemed to pay fair market value for most property received from a decedent’s estate. For example, if a decedent bought Apple stock at $100 per share and the stock is trading at $500 per share at death, the heirs are deemed to have paid $500 per share for the stock. When the heirs sell the stock, they pay less capital gains tax. This is referred to as a “basis step up.”

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Topics:  Estate Planning, Estate Tax

Published In: Tax Updates, Wills, Trusts, & Estate Planning Updates

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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