Estate Tax Exemption Portability

For wealthy individuals, estate tax exemption is an important part of estate planning. This exemption is the amount you can transfer to your heirs without incurring estate taxes. As of 2018, the amount is $5.6 million per individual, totaling to $11.2 million for couples.

But what happens if you don’t use your full exemption? Under the 2010 Tax Act, this exemption becomes portable between spouses.

What Is Estate Tax Exemption Portability?

In 2010, laws were passed that allowed spouses to transfer this exemption to one another upon their passing (starting in 2011). This means that if a husband or wife didn’t use the entirety of his or her estate tax exemption, whatever remains could be transferred to the surviving spouse. This concept is referred to as “portability” since the exemption is portable—it can move from one person to another.

How It Works

For instance, suppose Jim has an estate worth $4 million, and his wife Susan has one worth $6 million. When Jim passes away, he gives a total of $2 million to his children, leaving $2 million to Susan. Her estate then totals $8 million, which exceeds her own personal estate tax exemption limit of $5.6 million. It should be noted that under federal law, spouses may transfer property to one another without any federal taxation, so Jim’s gift of $2 million to Susan does not count against his exemption limit.

With the portability rules, Jim can pass on any unused portion of his exemption to Susan. Since he transferred $2 million to their children, that amount is subtracted from his total exemption of $5.6 million, leaving $3.6 million for Susan. That amount is added to her exemption for a total of $9.2 million.

This means when Susan passes away, she’d be able to transfer her entire estate of $8 million to her children and/or other beneficiaries without having to face federal estate taxes.
Now, if Jim had willed his entire estate to Susan, she would receive $4 million plus his entire exemption, meaning her exemption limit would become $11.2 million, which is still enough to cover her new total estate of $10 million.

Claiming Portability

Exemption portability can save couples massive amounts in taxes, but it isn’t automatic. It must be claimed on the deceased individual’s estate tax return by the surviving spouse by filling out IRS Form 706. Otherwise, the exemption is forfeited.

This can become a bit complicated because for most people, it is not required to file an estate tax return if the estate’s value is below the federal exemption limit. A surviving spouse may not think to claim portability, and that could result in some nasty surprises later on.

The deadline for claiming portability is nine months from the date of death (plus six months if an extension is filed). While this may seem like plenty of time, it can still slip through the cracks for a grieving family.

In order to make sure your exemption is transferred properly (along with any other property you currently possess), it’s worthwhile to hire an estate planning attorney. Hart David Carson LLP can provide you with skilled legal guidance when planning for your estate.

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