As part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the exemption amount for Federal estate and gift tax purposes has been increased to $5,000,000. Moreover, the unused portion of the exemption is portable between spouses. That is, if husband has made no lifetime gifts and leaves an estate valued at $2,000,000 that does not qualify for the unlimited marital deduction, his surviving spouse may claim the unused $3,000,000 of husband’s exemption at the time of her death. This, of course, is also applicable in the case of larger estates. One benefit of the legislation is that it creates the ability of the surviving spouse to enjoy unfettered access to a greater portion of wealth upon the death of the first spouse without missing the opportunity to take full advantage of both spouses’ entire unified credit amounts. This development could prove to be a valuable estate planning tool, however, it assumes that certain formalities have been observed and conditions met.

In 2011, a $2,000,000 estate does not ordinarily require a Federal estate tax return to be filed because no Federal estate tax is due. However, in order to accurately calculate the portable exemption amount, a return must be filed even though no tax will be due. Also, if the surviving spouse subsequently remarries, her first spouse’s unused $3,000,000 exemption amount will cease to be available to her upon her death. Moreover, this legislation will expire at the end of 2012. For example, Husband dies in 2012 with a $5,000,000 estate and leaves $2,000,000 to a credit-shelter trust for the benefit of his children and $3,000,000 to Wife outright. Wife, intending to elect to use Husband’s $3,000,000 unused exemption amount, may discover that it is unavailable to her after 2012. The result would be a missed opportunity to take advantage of Husband’s exemption amount at the time of his death and a possible increase in Wife’s estate tax liability at the time of her death. Such a result could be magnified if the current $5,000,000 exemption amount (which will also expire at the end of 2012) is reduced.

Another consideration is that certain assets are likely to appreciate and/or produce income. While the portability feature may effectively shelter the $10,000,000 estate of a married couple, absent effective additional planning, the value of those assets’ appreciation after the first spouse to die will not be sheltered from federal estate tax. Because the portability feature is temporary, it may be wise for people with considerable assets to continue considering credit-shelter trusts as an effective strategy to shelter wealth and appreciating assets from estate taxes.

The state of Illinois does not itself have a portability feature for estate tax purposes (currently Illinois recognizes a $2,000,000 exemption for the purposes of assessing its estate tax). Relying only on the Federal estate tax portability feature without further planning for the Illinois tax will translate to a missed opportunity at the time of the first spouse’s death to pass on wealth that will be exempt from state estate tax.