Thanks to Congress, everyone is born with their own (speaking colloquially) "Lifetime Tax-Free Gift Amount," that amount we can each give away in our lifetime or at death free of federal gift or estate tax. That amount has varied over time, at one time being $650,000 and reaching as high as $3.5 million by 2009. But until this year that amount belonged to you and you alone; it was not transferable. If you died before you used it it was lost forever.
To maximize the utilization of this Lifetime Tax-Free Gift traditional estate planning--at least among those smart enough to do estate planning--was to place a portion of the assets of the spouse who was the first to die into a trust, often for the surviving spouse and kids, to absorb the Lifetime Tax-Free Gift. In this way, this amount would be shielded from federal estate tax in the first spouse's estate as well as the second spouse's estate. The rest would go to a trust (or outright) for the surviving spouse, thereby using the "Marital Deduction" to shield this portion from estate tax in the estate of the first decedent as well.
For 2011 and 2012 (but not beyond, barring further changes to the law) two of the major changes to the federal gift and estate tax regime include an increase in this Lifetime Tax-Free Gift to $5 million and a limited ability to transfer this Lifetime Tax-Free Gift to the surviving spouse if the decedent does not use it during life--what has been known as Portability, or more technically the Deceased Spousal Unused Exclusion Amount ("DSUEA"). So a surviving widow can conceivably give away to anyone (or among any number of anyones) during life or at death up to $10 million (her own $5 million Lifetime Tax-Free Gift plus her deceased husband's unused $5 million Lifetime Tax-Free Gift, i.e. his DSUEA) without federal gift or estate tax. In other words, it is no longer "use it of lose it" for the first spouse to die, at least with some limitations and qualifications. Of course failure to observe these limitations and qualifications can squader this wonderful opportunity.
In subsequent blogs I will tell you about how to qualify for the DSUEA, how to best utilize this DSUEA, and risks as the law unfolds. Stay tuned.