Plan Ahead on Estate to Avoid Probate

Probate is a court-supervised process of transferring assets after a person dies. Assets subject to probate do not include those that were payable to a named beneficiary (e.g., life insurance), owned by a trust, or owned jointly with rights of survivorship (e.g., joint bank account between spouses). Anything not directed to another person upon death may become subject to probate.

Formal administration, which is the most common probate proceeding, typically takes approximately one year to resolve. Due to the time and legal expenses involved, it is advisable to craft an estate plan that avoids probate.

To avoid probate, an individual planning his or her estate should discuss with an attorney the proper way to title assets in multiple names or placing assets within a living trust. By titling all assets with multiple names (in the proper manner, so as to provide automatic transfer to the second owner upon death of the first), probate can be avoided.

A properly funded living trust can hold a person's assets and often can be administered without court intervention. The process is technical, and you are encouraged to get counsel to assist so as to best ensure avoiding a probate proceeding.

Although many dread probate proceedings, there may be advantages to court supervision. For example, the probate process allows for an estate to clarify what creditor claims exist and cut off claims of lazy or careless creditors.

In the court proceeding, a "notice to creditors" is filed, allowing a 90-day period for creditors to file claims against the decedent's assets.

If claims are not filed within the 90-day window, they are forever barred.

Tax Planning: Should Wealthy Individuals Move?

FROM ONWALLSTREET.COM

"Location, location, location" the well-known real estate mantra, is a notion that advisors of high- and ultrahigh-net-worth clients might also want take to heart.

"Residency drives how much sophisticated wealth structuring and asset protection you can do," says Merrill Lynch advisor Adam Katz.

While the concept that it's better to live in low or no tax states isn't complicated, the strategies for advising and taking advantage of tax mitigation by location are anything but simple, say advisors.

"The bottom line is that it's really complicated, nuanced, and not a perfect one-size-fits-all," says Katz.

TOO TAXING?

"The first thing everyone wants is to be in a zero percent income tax state for tax purposes," says Lisa Featherngill, managing director of wealth planning at Wells Fargo's Abbot Downing group. "But the most important thing is whether or not it makes sense for the client."

For example, if a client changes residence to Florida, a no income tax state, that can mean a 10% savings, she says, but that also means the client has to spend at least half the year there. If the client can't or doesn't want to spend enough time in another state to be a legal resident for tax purposes, the savings won't be worth the disruption.

And while Florida has no estate or inheritance tax, says Featherngill, the state is known for its heavy probate fees, so advisors may suggest setting up revocable trusts.

RELOCATION

The most aggravating disruptions in residence changes can be meeting and proving state requirements, especially where clients divide their time between several states, which have different rules. Advisors recommend working closely with experienced accountants and tax lawyers because clients will have to change more than their mailing addresses – sometimes they will have to provide detailed accounting to the state, which can also ask for bank, credit card and phone records to establish whether an individual has community connections and financial relationships in the state.

Featherngill has even seen concern about the location of an advisor entering the picture. "We've seen people changing advisor relationships to find an advisor in the new state," she says. "Maybe the advisor should move with them, if it’s a significant enough client." But she adds that it might be just as effective if the advisor makes sure to travel to the client’s new home state for in-person talks, as opposed to having meetings in the client’s previous state.

TRUST STRATEGIES

Setting up a trust in another state can sometimes benefit HNW clients without any need to change residency. More than a dozen states allow self-settled trusts, which offer creditor and estate tax protection.

Some states, like Delaware, have no income tax on trusts, so there may be opportunities for tax mitigation for clients without a need to move, says Katz, vice president of Merrill's Bodner Sax Group in New York.

"It’s very nuanced and complicated stuff, but definitely something to think about," he says.

For example, a Delaware incomplete non-grantor trust, or ING, allows the resident of a high-tax state to re-domicile ownership of a business to Delaware, where the owner still has full control and assets without home state tax liability.

Katz points out that New York disallowed its residents from taking state tax advantages of INGs, but that New Jersey still permits them.

"There’s a lot of complexity to where you spend your time and where your business makes money," says Katz. Advisors need to work closely with tax experts and lawyers to make sure that no one is blindsided.

"You don’t try to guess about the way it works," he says.

'DECISION TREE'

In fact, any time he thinks about setting up an ING trust, he makes sure that his team goes to the IRS to get pre-approval. "It costs money, not only to have the IRS review it, but to have an attorney provide and document all the moving parts of that ING trust," Katz says.

Despite the added costs, Katz says that he has frequent discussions with the wealthy entrepreneurs he advises about such approaches, bringing in other experts and making sure his clients understand "the decision tree".

"It’s definitely an upfront investment of time and money," he says. "It doesn’t mean it’s not worth it, but it definitely adds complexity to your life.

Put Estate Planning on Your Bucket List

FROM FOXBUSINESS.COM

When the time comes for checking your financial to-do list, estate planning is most likely  the last item you’ll get to—if you get around to it at all.  It is estimated 120 million Americans lack an up-do-date estate plan.

Business owners also need to add succession planning to their checklist to ensure an effective transition following the founder’s retirement or death.

The New Year is a great time to organize your assets to avoid family fights and prevent a majority of your estate from going to the government.

Tom Jones, shareholder and chair of the corporate practice group at Chamberlain Hrdlicka (Atlanta), discussed the following essential  considerations for estate and succession planning:

Boomer:  What are the limitations of my will? Do I need a trust?

Jones:  In many cases, a will alone is sufficient and separate trusts are not necessary to provide a fully functional estate plan. Also, many wills contain trusts within the will document itself for tax planning and family protection purposes.

In larger estates, however, there will almost always be a need for one or more trusts in addition to the will. For example, it is very common to establish a separate trust to hold life insurance policies in a manner that will remove the policy proceeds from the estate of the individual insured for estate tax purposes.

Boomer:  What of my estate assets will be taxed?

Jones:  Generally speaking, all of the property and assets of a U.S. citizen or resident, of whatever nature and wherever located, will be subject to U.S. estate tax at death. In fact, some property interests that one might not expect to be counted as the property of the deceased person will be included in their taxable estate, such as property not actually owned by them but over which they have legal control.

As part of the estate planning process, it is important to develop a full inventory of all such property and property interests in order to project likely estate tax obligations at death.

Boomer:  How can I prepare my heirs to receive their inheritance?

Jones:  This will vary from family to family. In some cases, it is possible, indeed healthy, to have full, frank and open discussions with children about the nature of the estate that they are likely to inherit in the future. In other situations, due to family discord or particular issues with one or more of the beneficiaries, such dialogue may not be useful and may even be counterproductive.

Boomer:  What is business succession planning and how do I know if I need this advance planning?

Jones:  Business succession planning typically refers to the process of transition when the owner of a closely-held business retires or dies. Every business owner should have such a plan, whether it involves transitioning ownership and/or management of the business to employees or family members or potentially selling the business to a third-party. It is never too early to begin considering these transition issues.

Boomer  What are some of the choices available to a business owner to plan his or her estate and transfer interest in a family business?

Jones:  One type of plan that is frequently utilized involves giving voting control of the business to the “heir apparent” who is actively involved in management of the business while providing non-voting shares of the company to the other children who are not actively involved in management. Transition plans involving non-family employees often include the purchase of shares in the business over time.

In some cases, an ESOP, or employee stock ownership plan, may be a very effective transition tool.

In all cases, the business owner and his or her advisors should devote careful analysis to the legal, tax and human factors that will ultimately determine whether the plan succeeds or fails.

How to avoid the IRS by planning ahead for tax-free inherited IRA rollovers

In a pair of recently decided private letter rulings, the IRS unexpectedly blessed tax-free rollover treatment in situations where spouses inherited IRAs that did not actually designate them as beneficiaries. The rulings were surprising because, in completing the rollovers, these IRA funds passed through trusts that did not technically allow for the tax-free rollover treatment. While favorable rulings preserved the valuable IRA tax deferral for these surviving spouses, the results were by no means guaranteed, and the inconvenience of obtaining IRS rulings could have been avoided entirely had the taxpayers in these cases planned properly in the first place.


Private letter rulings 201430026 and 201430029: The facts

Both of these recent private letter rulings (PLRs) involved cases where a deceased spouse named the surviving spouse’s trust — rather than the surviving spouse herself — as designated beneficiary of the IRA. When each IRA owner died before reaching age 70½, the IRA funds were distributed into each of the surviving spouse’s trusts. The surviving spouses then attempted to roll those funds into their own IRAs, a technique that would have been easily accomplished had the surviving spouses themselves been designated IRA beneficiaries.


The general rule governing inherited IRA funds that are paid into a trust provides that the surviving spouse is no longer eligible to roll those funds into an IRA in his or her own name once the trustee actually distributes the proceeds to that trust. In such a case, the surviving spouse is treated as though he or she received the proceeds from the trust, rather than from the deceased spouse’s IRA.


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However, the IRS found that this general rule does not apply when the funds are considered to have been distributed to the surviving spouse only because he or she is named as sole trustee of the trust that received the IRA proceeds. In each of these PLRs, the surviving spouse was sole trustee and had the power to control trust payments, add trust property, or amend or revoke the trust. Therefore, the IRS exempted them from the general rule and allowed them to roll the IRA proceeds from the trust into their own IRAs within sixty days without incurring income tax liability.

The surprise ruling

The results in these cases were surprising because neither of the trusts would qualify as see-through trusts that could be looked through to use the trust’s beneficiary as the IRA designated beneficiary. Therefore, the rules governing nondesignated beneficiaries could have applied to prevent tax-free rollover treatment.

Generally, if IRA proceeds pass to a designated beneficiary, the life expectancy of that designated beneficiary can be used to stretch withdrawals from the inherited IRA over the beneficiary’s lifetime. Similarly, if IRA proceeds pass to a nondesignated beneficiary after the original account owner has begun taking required minimum distributions (RMDs), the remainder of the account proceeds can be distributed based on the life expectancy of the original owner. However, if the proceeds pass to a nondesignated beneficiary before RMDs have begun, the IRS can require that the entire account balance be distributed within five years of the original owner’s death.

In this case, because the original account owner’s RMDs had yet to begin and the designated beneficiaries were trusts (which have no life expectancies), but not see-through trusts where the trust beneficiary’s life expectancy can be used, the IRS could have prohibited the rollover treatment that allowed the IRA proceeds to be distributed over the lives of the surviving spouses.

Proper planning strategy

The time and expense of obtaining a favorable IRS ruling could have been avoided if the deceased spouses had simply designated their spouses directly as beneficiaries under the IRAs. In the alternative, the designated beneficiaries could have been trusts that qualified as see-through trusts.

In order to qualify as a see-through trust, four requirements generally apply: the trust must be valid under state law, the trust must be irrevocable (or must become irrevocable upon the death of the IRA owner), the trust beneficiaries must be identifiable, and a copy of the trust must be provided to the IRA custodian by October 31 of the year after the IRA owner’s year of death.

The trusts here were revocable by the surviving spouses, so failed to meet the second requirement, which forced the surviving spouses to turn to the IRS to approve the tax-free rollover treatment.

Conclusion

The surviving taxpayers in these cases stood to lose thousands in immediate income tax liability had the IRS decided that tax-free rollover treatment was impermissible. While the IRS eventually ruled in their favor, advisors should note that simple advance planning could have prevented the question entirely had the designated beneficiary forms been properly prepared.

Estate Planning 101: How to Divide Your Money

When you die, who gets your money? Your kids, you’d think.

Now that you know the estimated amount you have to give, most of the math is over. The rest of the calculations have to do with who gets what proportion of your assets.

This is not entirely yours to decide. There is a legally determined order of payments out of a person’s taxable estate. Assets in forms other than personal taxable accounts, such as through corporations, trusts, and individual retirement accounts, have different requirements. You should seek a trusts and estates professional if your estate plan includes such vehicles.

The starting point is the total amount of your assets. First tier is your liabilities, including any final income taxes, debts, funeral expenses and the expenses of administering your estate.

The next set of deductions from a taxable estate is the gifts made to charity. Then, the Internal Revenue Service collects estate taxes, if any. As of 2014, only estates with values exceeding $5.34 million must pay federal estate taxes. What is left over is the amount you can give to your heirs.

You need to make decisions for two levels: charitable gifts and bequests to taxable heirs. You decide exactly who gets how much, and on what basis.

Keep in mind that there are many nuances to these calculations that are beyond the scope of this article. For example, gifts and assets left to your spouse are exempt from transfer taxes, so long as you both are U.S. citizens. This is called the marital deduction. The IRS doesn’t tax the assets transferred between spouses.

Expert guidance is essential to navigate you through the complexities, and create an estate plan that maximizes the inheritance you leave your loved ones.

5 Questions to Ask Before Making Gifts for Medicaid or Tax Planning

Many seniors consider transferring assets for estate and long-term care planning purposes, or just to help out children and grandchildren. Gifts and transfers to a trust often make a lot of sense. They can save money in taxes and long-term care expenditures, and they can help out family members in need and serve as expressions of love and caring.

But some gifts can cause problems, for both the generous donor and the recipient. Following are a few questions to ask yourself before writing the check:

1. Why are you making the gift? Is it simply an expression of love on a birthday or big event, such as a graduation or wedding? Or is it for tax planning or long-term care planning purposes? If the latter, make sure that there's really a benefit to the transfer. If the value of your assets totals less than the estate tax threshold in your state, your estate will pay no tax in any case. For federal purposes the threshold is $5.34 million (in 2014). Gifts can also cause up to five years of ineligibility for Medicaid, which you may need to help pay long-term care costs.
2. Are you keeping enough money? If you're making small gifts, you might not need to worry about this question. But before making any large gifts, it makes sense to do some budgeting to make sure that you will not run short of funds for your basic needs, activities you enjoy -- whether that's traveling, taking courses or going out to eat -- and emergencies such as the need for care for yourself or to assist someone in financial trouble.
3. Is it really a gift (part one)? Are you expecting the money to be paid back or for the recipient to perform some task for you? In either case, make sure that the beneficiary of your generosity is on the same page as you. The best way to do this is in writing, with a promissory note in the case of a loan or an agreement if you have an expectation that certain tasks will be performed.
4. Is it really a gift (part two)? Another way a gift may not really be a gift is if you expect the recipient to hold the funds for you (or for someone else, such as a disabled child) or to let you live in or use a house that you have transferred. These are gifts with strings attached, at least in theory. But if you don't use a trust or, in the case of real estate, a life estate, legally there are no strings attached. Your expectations may not pan out if the recipient doesn't do what you want or runs into circumstances -- bankruptcy, a lawsuit, divorce, illness -- that no one anticipated. If the idea is to make the gifts with strings attached, it's best to attach those strings legally through a trust or life estate.
5. Is the gift good for the recipient? If the recipient has special needs, the funds could make her ineligible for various public benefits, such as Medicaid, Supplemental Security Income or subsidized housing. If you make many gifts to the same person, you may help create a dependency that interferes with the recipient learning to stand on his own two feet. If the recipient has issues with drugs or alcohol, he may use the gifted funds to further the habit. You may need to permit the individual to hit bottom in order to learn to live on his own (i.e., don't be an "enabler").

If after you've answered all of these questions, you still want to make a gift, please go ahead. But unless the gift is for a nominal amount, it is advisable to check with your attorney to make sure you are aware of the Medicaid, tax and other possible implications of your generosity.

Estate Planning for Modern Families

Traditional estate plans don’t work well for many families these days. A traditional plan is for couples who are in their first and only marriage and have only kids from that marriage. Different plans, tools, and strategies might be needed for people with other life stories.

Let’s start with planning for the single person. Many people now are unmarried for a substantial part of their adult years. They might be widowed, divorced, or never married. They might be in relationships that don’t include legal marriage.

Several issues are the same for all of them.

The first focus of a single adult’s estate plan should be to ensure that someone competent will manage the property and other matters if the individual is unable to. The best solution usually is a durable financial power of attorney or a living trust or both.

You also need a medical directive, which can include a medical power of attorney, living will, and other instructions. These documents designate one or more people to make decisions about your medical care when you aren’t able to. We don’t have space here to discuss these in detail. Detailed discussions are on theRetirement Watch members’ web site.

These tools also are important for traditional couples, but they are more important for others. State and federal law often provide some protection and presumptions for married couples but not for others. As with married couples, the key to making these tools work is naming the right people to make the decisions for you and being sure the documents properly empower them.

Surprisingly to many, you’re also likely to need a document naming people who can visit if you are in a hospital or other facility. This might be in the medical directive or a separate document. Many medical providers now interpret federal privacy law to restrict access only to family members unless there is a clear statement from the patient.

Long-term care insurance or some other plan for long-term care might be more important for an unmarried person than for a married couple. A single person doesn’t have a spouse who might be able to assist him or her. While Medicaid will pay for nursing home care while allowing you to retain some assets, a married couple usually is allowed to retain more assets than a single person. In addition to a single person’s being able to retain fewer assets for a legacy, the assets of any partner of the single person might be endangered under Medicaid, especially if the assets are owned jointly.

Those are common issues for all single persons and others in non-traditional families. Now, let’s look at different situations they might face.

Unmarried estate planning candidates fall into three categories: Those who have children from a previous marriage or relationship; those who never had children; and those who are part of a couple but won’t be getting married or whose state doesn’t recognize their marriage. The categories can overlap, but each category has some unique challenges.

As with a married person, a single person who passes away without a will has the disposition of the property determined by state law. If there are biological children, in most states the property will be divided equally among the children. If there are no children, the disposition can be very unexpected, depending on the state and which relatives are alive. The property could go to half-siblings, cousins, or nieces and nephews. Single adults, especially those without children, are more likely to have nonfamily and charities as objects of affection and so prefer a disposition different from that offered by state law.

Issues about children from more than one relationship and nonbiological children are discussed later with patchwork family issues.

With a traditional couple in these situations, the solution is to draft a will, but single people might prefer having most assets pass through a revocable living trust. Depending on the state, the probate process for a will might require notice to everyone who would have been eligible to inherit if there had not been a will. For an unmarried person, especially one without children, that can mean constructing a family tree and proving the demise or divorce of extended family members.

Property in a living trust avoids probate, and the terms of the trust determine who inherits the property. A will still is needed because it might not be possible to transfer all property to the trust, but the living trust might minimize delays and costs.

Another key issue for singles is the choice of an executor or successor trustee when there is no spouse or adult child to take the role. There might be friends or family members who are able and willing to handle the position. Otherwise, a trusted advisor, such as an accountant or attorney, might be the best choice.

There are a number of assets that aren’t covered by a will or living trust. These assets include IRAs, retirement plans, annuities, and life insurance. Singles need to decide who they want to benefit from these assets, complete their beneficiary designation forms, keep copies of the forms, and update the documents when appropriate. The executor of your estate needs to know about these assets and where to locate your records.

Taxes are an interesting planning issue. The income tax law can be more generous for unmarrieds, but the estate tax is less generous to singles than to married couples.

Often a married couple pays higher income taxes than two single people with the same incomes. Partly for that reason, some seniors choose to live together without getting married. Staying unmarried allows them to file separate returns, and a couple might be able to shift some deductions to the one in the higher tax bracket.

Under the estate and gift tax, singles do not have the advantage of the marital deduction. An unmarried person still can use the annual gift tax exclusion, make unlimited gifts for education and medical expenses, and use the $5.34 million lifetime estate and gift tax exemption. The lack of a marital deduction now matters only to fairly wealthy unmarried seniors, but for them it does limit the after-tax amount that can be left to noncharitable beneficiaries. For them, life insurance might be more attractive than it is for married couples.

The annual gift tax exclusion can be used to benefit anyone. Those without children often use it to benefit nieces, nephews, and other relatives.

Care must be taken when using the lifetime gift tax exemption amount. It often is better to make gifts early as long as sufficient assets are retained to support the standard of living. Yet, the objects of affection might change over time, especially in nontraditional families. So if the exemption is used early, be sure the recipients of the largess are likely to be permanent objects of affection.

For many single seniors, especially those without children, a legacy of charitable giving is more important than it is for marrieds. The singles’ estate plans might contain more charitable gifts than others. In addition, they might make more lifetime use of strategies such as charitable trusts to generate current income tax savings and income during their lifetimes, reduce the size of their taxable estates, and leave charitable gifts.

Social Security and pensions leave few options. Social Security does not allow designation of a beneficiary other than the spouse, and a number of employer pension plans have the same restriction. The main options to replace this income for a surviving loved one who is not a spouse are to buy life insurance or have other assets to leave the person. Another possible strategy is to place assets in a charitable remainder trust that pays income to a beneficiary for life or a period of years, and then the remaining assets go to charity.

The population of single adults is increasing, and it faces unique estate planning challenges. These individuals should be sure to work with an estate planner who understands their special situations.

Another type of nontraditional family often is called a “patchwork family.” These are families in which at least one spouse is in a second or later marriage and there are children from one or more of the marriages or other relationships.

Estate planning issues generally are important in these families. The spouses usually want to provide for each other. But they might have different objectives beyond that.

A common situation is that a spouse wants his or her assets to provide for the surviving spouse during his or her lifetime, but wants any remaining assets eventually go to his or her biological children. There often is a concern that if property is left outright to the surviving spouse, the assets ultimately might not be distributed among the children as desired. Also, when there are children from more than one relationship, there might be a preference to favor one set (such as the younger children) over the other. Some people want to provide for stepchildren, while others don’t.

For patchwork families, trusts are the usual way to resolve these issues. The primary goal of the trusts isn’t tax reduction. Instead the trusts are used to control how the property is managed and distributed over time. The terms and number of the trusts vary based on the family situation. There might be one family trust or separate trusts that filter down to different members or branches of the family. The estate owner needs to determine his or her goals and have the estate planner write a plan that best meets those goals.

The downside to using trusts is that you probably can’t make full use of both spouse’s lifetime estate and gift tax exemptions. That’s not an issue for most families, because of the $5.35 million individual exemption, but can result in trade offs for wealthier families.

Patchwork families also seem to have more will contests and other disputes than do traditional families. This risk can be reduced if the spouses sign a premarital or postmarital agreement. Otherwise, if you have only a will, it is easier for your spouse or even your spouse’s children to challenge the terms. Also, let your children know generally how you intend to distribute the assets between the families. If you state this at the outset, it becomes much more difficult for one of them to challenge the plan.

When it’s a second or later marriage, the spouses almost certainly should have separate attorneys for their estate plans. There are just too many potential conflicts for one attorney to serve the two spouses. In addition, to avoid potential conflicts and suspicions, many estate planners recommend that you give your durable power of attorney, health care proxy, or living will to one or more adult children or other people instead of your spouse.

No Wisconsin Estate Tax For 2011 and 2012

As a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, approved by Congress and signed into law by President Obama on December 17, 2010, there is no Wisconsin estate tax for deaths in 2011 and 2012 unless action is taken by the Wisconsin Legislature to impose an estate tax.
A federal estate tax is imposed on estates of $5,000,000 or more. The credit for state death taxes paid has been eliminated for deaths in 2011 and 2012, which would have been the basis for Wisconsin's estate tax. The Act allows a deduction for state death taxes paid.
On January 1, 2013, EGTRRA sunset provisions would again apply with federal or state legislative action necessary to eliminate the Wisconsin estate tax for 2013.

Married Couple's Guide To The New Estate Tax Law

The sweeping tax overhaul that President Obama signed Dec. 17, raising the exemption from federal estate tax to $5 million a person, includes a wonderful new break for widows and widowers. Starting in 2011, they can add the unused estate tax exemption of the spouse who died most recently to their own. This dramatic change enables spouses together to transfer up to $10 million tax-free. It also eliminates the need in many cases for the tax-planning gyrations that lawyers routinely recommended to preserve each spouse's estate tax exemption amounts.
Portability, as tax geeks call it (though that term does not actually appear in the new law), was a surprise goodie. Various estate tax bills proposed in Congress over the years would have permitted it. Many people favored it. But it seemed to be off the table until it resurfaced in the bill Senate Majority Leader Harry Reid, D-Nev., introduced following the Obama-Republican compromise.
The law doesn't change the fact that you can give an unlimited amount to your spouse, during life or through your estate plan (provided she or he is a U.S. citizen) with no tax applied. But until now, without proper planning, when the second spouse died anything above the exempt amount not going to charity would be taxed. In other words, the first spouse's exemption would be lost. Bypass trusts (also called family trusts) addressed that problem.
Here's how these trusts work: When the first spouse dies, the trust is funded with up to the tax-free exemption amount. The trust distributes income and principal to the survivor or other family members (usually the couple's children) while the surviving spouse is alive, then passes on whatever is left to family. Funds in the bypass trust are covered by the exemption amount and are not taxed when the first spouse dies. Nor are they considered part of the survivor's estate, so they are not subject to tax when she dies.
All this is still true, but portability makes it unnecessary for spouses to use bypass trusts solely to preserve the federal exemption amount. However, 15 states and the District of Columbia still have their own estate taxes, and most have exemptions of $1 million or less. None, as of now, have any portability provisions. That means residents of those states may still want to use bypass trusts to preserve their state estate tax exemptions. As with any new process there will be a shakeout period. Portability takes us into uncharted waters, raising financial planning opportunities and potential pitfalls that are new to us all. Here are answers to what are likely to be some frequently asked questions:
Does this provision help me if my spouse died years ago? No. It applies only to deaths after Dec. 31, 2010.
Does portability apply to lifetime gifts as well as assets that pass through an estate plan? Yes. Under the new law, starting in 2011, the lifetime exemption and the estate tax exemption are expressed as a total amount, and it is possible to use this "unified credit" to transfer assets at either stage or a combination of the two. (From 2004 to 2010, the two amounts were different; the gift tax exemption remained at $1 million, while the estate tax exemption went up.)
The estate tax exemption amount is reduced for lifetime taxable gifts. So if, for example, you have used $1 million of the exemption to make taxable lifetime gifts, the unused exemption when you die will be $4 million, rather than $5 million.

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Is portability automatic? No. The executor handling the estate of the spouse who died will need to transfer the unused exemption to the survivor, who can then use it to make lifetime gifts or pass assets through his or her estate.
The prerequisite is filing an estate tax return when the first spouse dies, even if no tax is due; one would hope that the Internal Revenue Service will develop a short form for the purpose.
This return is due nine months after death with a six-month extension allowed. If the executor doesn't file the return or misses the deadline, the spouse loses the right to portability. Spouses should file it even if they're not wealthy today, because someday, who knows?
For example, let's say Harry has an unused exemption amount of $2 million when he dies next year (say because he left $3 million to his children outright). His widow Sally has a $5 million exemption amount of her own. As the executor of Harry's estate, Sally can file a return, transferring Harry's unused exemption, so that she will then be able to pass $7 million tax-free (her own $5 million exemption plus Harry's $2 million unused exemption).
Is the amount that's portable adjusted for inflation? No, but the surviving spouse's own exemption amount is after 2011.
What happens if you remarry? This is where things may get complicated. The law clearly indicates that if, for example, Sally remarries after Harry's death, she can no longer use Harry's unused exemption amount--only the one of her new husband (call him Joe), assuming she survives him too. If Joe's unused exemption is less than Harry's (or if he has no unused exemption at all), Sally is out of luck.
What if Sally dies first? Sally came into the marriage with a $7 million exemption amount, including the $2 million unused exemption from Harry. Assume she leaves $3 million to the children she and Harry had together. Posing a similar situation, a report by the Joint Committee on Taxation indicates that Joe can use the remaining $4 million exemption, along with his own.
Can I use my exemption instead to provide for children from a previous marriage? Yes. You can do this with just part of your exemption amount--or the whole thing--by leaving assets to them outright or in a bypass trust.
Is this a subject that should be covered in prenuptial agreements? Macabre as it may sound, inheritances often are the subject of prenups, especially when there are children from a previous marriage. And wills often specify the funds from which estate taxes should be paid (for instance, it's not tax efficient use retirement assets for this purpose). So while this is certainly a new topic, if it concerns you, it's something you should address.

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Does portability also apply to the exemption from generation-skipping transfer tax? No. This tax applies, on top of estate or gift tax, to assets given to grandchildren (or to trusts for their benefit). Although there is no portability at death, for transfers during life married couples can combine each of their exemptions to give away a total of $10 million without incurring the tax.
Do I still need a bypass trust? The trust has the advantage of sheltering appreciation and could also be helpful in situations where you want to protect assets from creditors or benefit children from a previous marriage. But for most other cases, where couples have combined estates of $10 million or less, they might be better off just leaving everything outright to each other in what is called an "I love you will."
When outright bequests to the surviving spouse make sense for estate tax reasons, there may also be income tax benefits down the line. When the second spouse dies, these assets, included in her estate, get an adjustment in basis to their date of death value, which minimizes the capital gains tax heirs must pay when they are sold. In contrast, the basis on assets that went into the bypass trust when the first spouse died will not have changed since then.
Is portability here to stay? Along with all the other estate tax rules in the new law, this provision is set to expire on Dec. 31, 2012. Unless portability proves completely unworkable though, Congress is likely to renew it because the new system simply makes it easier to accomplish something that many couples have been doing anyway. But we might expect some refinements or clarifications to be necessary as the law gets applied in real life.