Additional Observations on the Gift Tax, State Estate Taxes and the Portability Provision

Increased Gift Tax Applicable Exclusion Amount

From 2001-2010, the applicable exclusion amount for gift tax purposes has been $1 million.  The 2010 Tax Act increases this to $5 million, or $10 million per married couple.  This change provides an unprecedented opportunity to move substantial amounts of wealth out of individuals’ estates.  There are several techniques that individuals can use to leverage this $5 million applicable exclusion amount and move considerably more wealth out of their estates.

To illustrate, individuals can now make gifts of $5 million to asset protection trusts, move all growth in such wealth out of their estates, provide a significant amount of asset protection for such assets, and the transferor may continue to be a discretionary beneficiary of such trusts, without any gift tax being assessed.

In addition, the increased gift tax applicable exclusion amount increases the amount of assets that individuals can transfer via an installment sale to a dynasty/grantor trust.  Under this estate planning technique, individuals can now make an initial gift of as much as $5 million ($10 million per married couple) to a dynasty trust, and then transfer as much as $45 million ($90 million for a married couple) to such dynasty trust in exchange for an installment note.  This technique works especially well for family businesses that are expected to grow significantly in value over time.

Given the fact that the Act will sunset without further Congressional action in 2012, we are advising clients that it would be prudent to implement estate planning techniques utilizing lifetime gifts before the December 31, 2012 sunset date.  Significantly, the Act preserves a favorable tax environment for making gifts by preserving the 35 percent gift tax rate for two more years.  Now that the threat of a gift tax increase to 55 percent beginning in 2011 has been averted, some individuals may be interested in postponing planned gifts in anticipation of the rate hike.

State Estate Taxes

Another blast from the past is back: the state death tax credit.  Many states have separate estate tax regimes with lower applicable exclusion amounts than the federal applicable exclusion amount.  When the credit was abolished, most states eliminated these symbiotic taxes.  It remains to be seen; however, which states will re-implement their own death taxes.  All states had benefited from these taxes by collecting revenues that would otherwise go to the federal government.  Yet, under the new estate tax rules, it appears that very few estates would be taxable.  It may be critical that the estate plans of individuals living in or owning property located in such states address such estate tax exposure.


One of the more notable provisions contained within the Act is the “portability” provision, which provides in general terms that if one spouse does not fully utilize his/her entire $5 million applicable exclusion amount, the unused portion can be used by the surviving spouse’s estate.  The significance of this is dramatic in terms of estate planning.  The entire concept of equalizing estates of husband and wife to the tax advantage of each spouse’s unified credit has been made unnecessary for tax purposes.  This provision is intended to avoid the need for credit shelter trusts in estate planning documents. Unfortunately, both spouses must die before 2013 in order to benefit from the portability provision.

However, credit shelter trusts continue to provide significant additional benefits beyond just the use of each spouse’s applicable exclusion amounts. These include the following:


  • Ensuring that assets contained in the credit shelter trust pass to children of the couple and not to any new spouse of the surviving spouse.
  • Ensuring that appreciation on the assets contained within the credit shelter trust, which may exceed the applicable exclusion amount at the surviving spouse’s death, are not subject to estate tax at that time.
  • Protection of assets in the credit shelter trust from creditors of the surviving spouse, including any marital claims of future spouses.

Given the fact that the portability provision will sunset in 2012, as well as for the reasons stated above, we are advising clients to continue to use estate plans that incorporate credit shelter trusts.

Continue reading blog series:

What’s NOT in The 2010 Tax Act

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