Federal estate taxes will not be an issue for most people during the immediate future due to 2012 legislation which permanently set the unified credit at $5 million and indexed it for inflation. Therefore, in 2016 a couple may jointly leave a combined $10.9 million to their children estate tax free.
In addition to the generous exemption amount, the other key change in the 2012 legislation is the permanence of the concept of portability for the exemption amount. Previously, the exemption amount was a use it or lose it affair. If a couple had assets worth more than the exemption amount, they had to use the exemption amount of the first spouse to die either by:
- leaving assets directly to their children upon the death of the first spouse (and ignoring the spouse) or
- by including trusts with their estate plan.
With portability a married couple does not have to implement a trust with their estate plan to minimize federal estate taxes because the surviving spouse may elect to preserve the exemption amount of the first spouse to die and use it upon his death.
The election to preserve the exemption will be made by timely (9 months after date of death) filing a federal estate tax return with the IRS on which the election is made. The result of the election is to enable the surviving spouse to leave up to $10.9 million estate tax free at death without using a trust upon the death of the first spouse.