Ever since the concept of portability was introduced in the estate tax rules, it has become a widely discussed term amongst the real estate planning professionals. For any married couple, it is essential to understand how this principle can affect their real estate plans. It is even more important for recent widows or widowers to be familiar with this term, as it can mean significant changes in their estate planning after the death of their spouse.
However, matters related to taxation are not always easy for the average person to understand due to some of the technicalities associated with it. To help you out, we have compiled a simplified guide on the concept of portability.
WHEN WAS THE CONCEPT OF PORTABILITY INTRODUCED?
In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (also referred to as TRUIRJCA) was signed by then US President Obama. This act brought about significant changes regarding the federal estate tax rules, gift tax rules, and the rules related to generation-skipping transfer taxes.
TRUIRJCA introduced the concept of portability in the federal estate tax exemptions applicable to married couples during the tax years 2011-2012. After that, the American Taxpayer Relief Act of 2013 decided that portability was going to be a permanent feature in the federal estate tax law from thereon.
Now that we know how the concept was introduced let’s look deeper into what it actually means and how the principle is applied.
WHAT IS PORTABILITY?
The principle of portability becomes applicable in the case of married couples where one spouse dies, and the federal exemption available to the late spouse remains unutilized. The amount of exemption that remains unutilized by the late spouse may be added to the exemption available to the surviving spouse, allowing him or her to use it along with their own exemption upon their death. This concept is known as estate tax portability.
Let’s have a look at a simple example to make things clear: the estate tax exemption for 2020 is $11.58 million per decedent, which is adjusted every year for inflation. It means that if an individual’s owned estate is worth $11.58 million or less at the time of your death, there is no tax on their estate. As portability allows the surviving spouse to use the deceased spouse’s unused exemption, this ultimately doubles the married couple’s total exemption amount to $23.16. In other words, they do not need to pay any tax on an estate worth $23.16.
HOW DOES PORTABILITY WORK?
Portability tax offers a significant advantage to married couples, allowing them to significantly reduce the tax liability on their estate following the death of a spouse.
It is worth mentioning here that the surviving spouse doesn’t automatically inherit the deceased spouse’s unutilized exemption; a portability election must be made. The surviving spouse must file the IRS Form 706, also known as the United States Estate (and Generation-Skipping Transfer) Tax Return. Through this form, the living spouse will elect to transfer the Deceased Spouse’s Unused Exemption Amount (DSUE) to be utilized by them. While the form itself includes instructions on how it is to be filed, it is advisable to consult a tax consultant for anyone who needs to go through the process.
WHAT IF THE SURVIVING SPOUSE’S ESTATE ISN’T LARGE ENOUGH TO BENEFIT FROM PORTABILITY?
In the case where the value of the estate owned by the surviving spouse isn’t large enough to benefit from portability, it is still a good idea to file for portability because his/her circumstances can change in the future. The surviving spouse could inherit valuables from someone or increase the assets they own, increasing the value of their estate above their own exemption amount. Moreover, there is a possibility that the federal estate tax exemption could decrease in the future.
WHAT SHOULD MARRIED COUPLES DO IN LIGHT OF THE PORTABILITY RULES?
It is recommended that married couples consult their estate planning attorney to decide if any changes are needed in their estate plans considering these portability rules. Their attorney can calculate the estimated value of the couple’s estate over their life and suggest whether there is a likelihood of their estate to be subject to estate taxes. They can also advise on whether the portability election is a feasible option considering the possibility of second marriages and other factors.
Surviving spouses are advised to get in touch with an estate planning attorney as soon as possible after their spouse’s death to ensure the portability election is made on a timely basis because failure to do so could result in serious problems.
THE BOTTOM LINE
There’s no denying the fact that estate tax exemptions and portability rules are a tricky topic to understand for the average person. However, it is necessary to be aware of the benefits you are entitled to under the law. For detailed guidance, you should always seek the help of experts in the field so that they can help you and support your needs based on your unique circumstances.
