At the end of 2012, the entire country watched as major changes were made to income tax laws with the adoption of the American Taxpayer Relief Act of 2012 (ATRA). The act also made significant changes in estate tax laws.
Estate Tax Portability
One important change is that the estate tax portability law is now permanent. Estate tax portability means that the unused portion of the first-to-die spouse’s estate tax exemption passes to the surviving spouse. The current estate tax exemption is $5.25 million ($5 million with adjustments for inflation). This means that a married couple’s total estate tax exemption is currently $10.5 million. For example, a husband dies with $2 million in separate assets. He has $3.25 million remaining in his estate tax exemption, which passes to his wife, giving her a total of $7.5 million in estate tax exemption. Without portability, the husband’s remaining exemption might have been forfeited if the couple had not implemented special tax planning techniques as part of their estate plans.
How Do You Claim the Portability?
This is where married couples and estate executors can get into trouble. The estate tax portability rule isnotautomatic. In order to claim the remainder of the first-to-die spouse’s estate tax exemption, the surviving spouse or the deceased spouse’s estate executor must file an estate tax return soon after the death, usually within nine months.
If this filing deadline is missed, then the couple will not get the benefit of estate tax portability. Missing the estate tax filing deadline can result in hundreds of thousands of unnecessary and avoidable estate taxes.
In a recent report inThe Wall Street Journal, estate planning experts expressed concern that executors of small estates may be unaware of the estate tax return filing requirement and may believe that an estate tax return is unnecessary if the deceased spouse’s assets fall under the $5.25 million exemption amount. To preserve portability, however, the estate tax return must be filed after the first spouse’s death. Alternatively, married couples can utilize a special trust, referred to as a “credit shelter trust” or “bypass trust” to prevent forfeiture of their individual exemptions. This planning technique must be undertaken when both spouses are still alive.
The Consequences of Failing to File an Estate Tax Return
As a simple example, consider a husband and wife who have a total of $7.5 million in assets, $6 million in a business the husband owns and the remaining $1.5 million owned by the wife. Upon the wife’s death, the estate’s executor files a timely estate tax return and the wife’s remaining $3.75 million in estate tax exemptions passes to the husband. When the husband dies, his entire $6 million business passes to his heirs tax free, even though his personal estate tax exemption is only $5.25 million. If portability is not claimed, then $1 million of the husband’s business will be taxed (the current rate is 40 percent). The husband’s heirs would be required to pay approximately $400,000 in estate taxes which could have been avoided if the wife’s estate executor had filed an estate tax return within the time limit.
Even if both spouses together have assets under the current $5.25 million exemption, it is still a good idea to file an estate tax return after the death of the first spouse. Filing the estate tax return and preserving the portability benefit protects the surviving spouse’s heirs in the event the surviving spouse receives a windfall during his or her lifetime that raises his or her assets above the $5.25 million exemption level.
Posted in: Estate Planning
FAQs
More specifically, it's a process where a surviving spouse can pick up and use the unused estate tax exemption of a deceased spouse. So then, the surviving spouse has both his or her own exemption from estate and gift tax but also, the unused exemption of the deceased spouse.
What is portability estate tax? ›
“Portability” is a provision that allows a deceased spouse's unused estate tax exclusion amount to transfer to the surviving spouse, helping to alleviate any wasted exclusion amount and creating greater flexibility for families.
What are the disadvantages of portability in estate planning? ›
- Estate Planning. ...
- The Problems With Portability - Nine Pitfalls. ...
- Pitfall # 1 – You Have to File to Get It. ...
- Pitfall # 2 – The Estate Tax Return Must Be. ...
- Pitfall # 3 – Unlimited Statute of Limitations for. ...
- Pitfall # 4 – Unlimited Record Keeping. ...
- Pitfall # 5 – Beware of Intra-Family Squabbles.
2022-32 over the summer, married couples who are not otherwise required to file an estate tax return at the death of the first spouse now have substantially more time to make a portability election, permitting the transfer of the deceased spouse's unused federal estate tax exemption to the surviving spouse.
Who should elect portability? ›
The estate tax return must include an opt-in election that the surviving spouse is electing portability of the deceased spouse's unused exemption. Failure to file the estate tax return or to include the election will result in the loss of portability.
What is the purpose of portability? ›
Portability is a way for spouses to combine their estate and gift tax exemptions. More specifically, it's a process where, after the first spouse dies, the surviving spouse can transfer (i.e., “port”) the unused estate tax exemption of the deceased spouse to himself or herself.
What happens to portability in 2026? ›
Portability helps minimize federal gift and estate tax by allowing a surviving spouse to use a deceased spouse's unused gift and estate tax exemption amount. Currently, the exemption is $12.92 million, but it's scheduled to return to an inflation-adjusted $5 million on January 1, 2026.
Why is portability good? ›
Software portability is important for applications, as the ability to work on other desktop and mobile platforms increases user flexibility and the application's potential user base.
Which state does not allow portability? ›
Rather than a progressive tax, Connecticut levies a flat 12% tax on amount overs the exemption. The state does not allow for spousal portability. And it is the only state with its own gift tax.
What happens to portability if you remarry? ›
Remarriage does not change the identity of the most recently deceased spouse. If portability has been elected, your clients have a right to the DSUE belonging to their spouse who most recently died. The fact that they have a second (or third) spouse is irrelevant – so long as that spouse is still living.
Many people worry about the estate tax affecting the inheritance they pass along to their children, but it's not a reality most people will face. In 2024, the first $13,610,000 of an estate is exempt from taxes, up from $12,920,000 in 2023. Estate taxes are based on the size of the estate.
How long does it take to file portability? ›
Time to file for portability is now extended to five years
In July 2022, the IRS issued a revenue procedure (Rev. Proc. 2022-32), which extended the filing of estate tax returns to elect portability to five years from the date of death of the decedent.
Is portability going away? ›
Extension of Time to Make Portability Election
Revenue Procedure 2022-32 became effective on July 8, 2022. This guidance allows certain taxpayers an extended amount of time (five years) to make a “portability election” regarding estate and gift taxes.
What is an example of estate portability? ›
An example of that is a gift upon death, or during life, to a US citizen spouse or certain trusts for his or her benefit. So, the concern might be if one spouse passes away and leaves all the assets outright to the surviving spouse, and the deceased spouse hasn't used any of his or her exemption.
When did estate tax portability start? ›
The concept informally known as “portability” is now permanent as a result of the enactment of the American Taxpayer Relief Act of 2012 (the “2012 Act”). Portability allows a surviving spouse to use a deceased spouse's unused estate tax exclusion (up to $5.25 million in 2013).
Who gets the tax refund of a deceased person? ›
If you file a return and claim a refund for a deceased taxpayer, you must be: A surviving spouse/RDP. A surviving relative. The sole beneficiary.
How does Florida portability tax work? ›
Florida's Save Our Homes (SOH) provision allows you to transfer all or a significant portion of your tax benefit, up to $500,000, from a Florida home with a homestead exemption to a new home within the state of Florida that qualifies for a homestead exemption. This is referred to as “portability.”
How long do you have to file a portability return? ›
Time to file for portability is now extended to five years
Proc. 2022-32), which extended the filing of estate tax returns to elect portability to five years from the date of death of the decedent.
