The huge tax law passed in December-officially, the Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010, which somehow neglected to include "World Peace" in the title-had few changes on the income tax side. The same tax rates from last year continue this year, as do various income tax benefits. Some tax breaks that lapsed in 2010 were reinstated retroactively and extended for this year.

However, the new law made dramatic changes to estate taxes. The federal exemption, known as the applicable exclusion amount, was set at $5 million, far above the $3.5 million in effect when the estate tax was last seen, in 2009.

Amounts more than $5 million will be taxed at 35%, down from 45% in 2009. In addition, the estate-tax exclusion was made portable between married couples; any amount unused by the first spouse to die carries over for the surviving spouse's estate.

"Portability does open up planning opportunities for clients," says Mike Foltz of Balasa Dinverno Foltz, a wealth management firm in Itasca, Ill. Although portability may seem to diminish the need for traditional strategies, such as trusts, smart planners can show their clients how trusts are still necessary to create even better estate plans.

HOME FREE?

To see how the new portability arrangement might work, assume a man we'll call Jerry dies this year, leaving a $7 million estate. He leaves $6 million to his wife, Lynn, and $1 million to their children. Bequests to a spouse who is a U.S. citizen are tax-free, no matter how large, and the $1 million going to the children is sheltered by Jerry's estate- tax exclusion. Therefore, Jerry's estate owes no federal estate tax.

Suppose that Lynn dies next year, when the estate-tax exclusion is set to remain at $5 million. Lynn's estate can use her $5 million exclusion plus the $4 million Jerry didn't use, for a total of $9 million. The combination of the $5 million exclusion and spousal portability effectively gives married couples a $10 million exemption from federal estate tax. (In estate planning lingo, portability is known as DSUEA, for the deceased spouse's unused exclusion amount.)

For many clients, the reaction might be, "With a $10 million estate-tax exemption, we're home free." Why incur the time and expense developing a complicated estate plan with multiple trusts when a simple plan that emphasizes spousal bequests can avoid estate tax?

"The biggest advantage of portability is that it can permit married couples to reduce the expense and complexity of their estate plans," agrees Julie Ann Garber, an attorney with the law firm Becker & Poliakoff in Fort Myers, Fla. "However, there are still reasons for married couples to consider planning with trusts," she adds. "The same may be true for unwed couples."

Phil Kavesh of Kavesh Minor & Otis, a law firm in Torrance, Calif., notes that many couples can benefit from trusts in their estate plan. In fact, Kavesh compiled a list of 12 Reasons to Fund a Bypass Trust Rather than Elect Portability. (A bypass trust, also known as a credit shelter trust, typically is structured to receive assets following the death of the first spouse sheltered by the estate-tax exclusion, yet shield those assets from estate tax upon the death of the surviving spouse.)

THE DURABLE DOZEN

What are some reasons to keep using bypass trusts-and perhaps other trusts as well-in this era of portability? For starters, Kavesh cautions that current laws only apply to this year and next. For 2013, there might be a smaller estate-tax exclusion or even a repeal of exclusion portability between spouses.

"I don't think married couples should adopt simplified estate plans, with the surviving spouse receiving most of the decedent's assets, until it is clear that portability will become permanent," Garber says. "Until then, I cannot recommend that clients rely on it."

The runner-up reason Kavesh cites is that assets might grow between the first and second spouses' deaths. In the above example, the $6 million Jerry leaves to Lynn, along with Lynn's own assets, might appreciate so much that Lynn dies with an estate that's subject to estate tax.

"The DSUEA [$4 million in this example] is not indexed for inflation," Kavesh points out. If the first spouse to die leaves assets to a properly drafted bypass trust, subsequent appreciation will be out of the surviving spouse's estate, regardless of when the second death occurs or what the tax law is at that time.

Another advantage of a bypass trust, according to Kavesh, is the right of the first spouse to die to distribute his or her assets the way he or she wishes, which might not be identical to the surviving spouse's distribution plan. Using a bypass trust also reduces the risk that, if the surviving spouse remarries, the deceased spouse's assets may eventually wind up in the hands of people the decedent never knew.