As a part of the American Taxpayer Relief Act of 2012, Congress simplified matters by unifying the federal estate and gift tax systems, and increased the amount of the exemption to $5,000,000, with annual adjustments for inflation. The Act also made the exemption “portable.”
To comply with the Act’s required adjustment for inflation, the exemption amounts have increased for estate, gift and generation-skipping transfer taxes, from $5,430,000 in 2015 to $5,450,000 in 2016. The ceiling on federal estate, gift and GST taxes remains at 40% and the permissible annual gift tax exclusion (that will allow you to make a gift without reducing your lifetime exemption amount) is still $14,000.
With the increase in the exemption amount, individuals may now make larger lifetime gifts, and can take advantage of strategies to transfer income producing assets to beneficiaries with lower tax brackets or lower income tax rates.
Essentially, the concept of portability means that the spouse of a deceased person may claim any unused portion of the estate of gift tax exemption. This offers a huge potential bonus to heirs upon the death of the surviving spouse. Because there is an unlimited marital deduction, there is no need to use any of the $5,000,000 federal exemption when a first spouse dies. Under prior law, though, the exemption of the first spouse could not be passed on to the surviving spouse, so it would be lost. Under the revised law, the $5,000,000 from the first spouse is portable, and may be claimed upon the death of the remaining spouse. So, instead of a deduction of $5,000,000, there would be a deduction of $10,000,000 upon the death of the second spouse.