Learn about this tax option for surviving spouses
Definition of Portability
Portability is available only to married couples. The unused estate tax exemption amount of the deceased spouse can be transferred to the surviving spouse if the first spouse passes away and their estate value does not consume the entire exemption.
The surviving spouse can use the unused estate tax exemption of the deceased spouse in addition to their own exemption when the surviving spouse dies later.
Note: This is a federal tax exemption. Hawaii and Maryland only offer portability for their estate tax exemptions starting in 2022.
Federal Estate Tax Exemption
The federal estate tax exemption is indexed for inflation, so it increases periodically, usually annually. It is $11.58 million for deaths occurring in 2020, up from $11.4 million in 2019. It is simply $11 million plus inflation adjustments.
Note: Exemptions are deducted from the estate value, and only the remainder is subject to estate tax. Very few estates fall below the threshold for paying this tax as a result.
History of Portability
The TRUIRJCA Act introduced the concept of “portability” for the federal estate tax exemption between married couples for the years 2011 and 2012. President Obama then signed the American Taxpayer Relief Act (ATRA) on January 2, 2013, making this tax option a permanent part of estate tax starting in 2013.
Note: Portability should remain a permanent part of federal estate tax law in the future unless Congress takes steps to repeal this option. Thanks to ATRA, it is no longer necessary to renew it to keep it in effect.
Examples of Portability
The portability option can make a significant difference when it comes to estate taxes.
Estate Tax Without Portability
Let’s assume Bob and Sue are married and that all their assets are jointly titled. Their net worth is $18 million. Bob passes away first in 2020, and the federal estate tax exemption is $11.58 million. The portability option for the estate tax exemption between spouses is not in effect.
His estate will not need to use any part of the $11.58 million estate tax exemption upon Bob’s death because all assets are jointly titled. The unlimited marital deduction allows Bob’s share of the jointly titled assets to pass to Sue automatically with no federal estate tax liability.
The federal estate tax exemption still stands at $11.58 million at Sue’s death. The estate tax rate is 40%, and Sue’s net worth remains $18 million.
Bob’s $11.58 million estate tax exemption was not used, and Sue could not claim it without portability, so Sue can only pass $11.58 million to her heirs without paying federal estate taxes upon her death. Sue’s estate will owe about $1,064,000 after her death:
Estate of $18,000,000 – $11.58 million exemption = Taxable estate of $6.42 million
Taxable estate of $6.42 million × Estate tax rate of 40% = $2.568 million in taxes owed
Estate Tax With Portability
Assume the same scenario: Bob and Sue are married, and they have all their assets jointly titled. Their net worth is $18 million. Bob passes away first, and the federal estate tax exemption at the time of Bob’s death is $11.58 million. The portability option for the estate tax exemption between spouses is in effect, so upon Sue’s death:
Estate of $18 million – $23.16 million in combined estate tax exemptions = $0 taxable estate
Will not
Bob’s estate needs to use any part of his estate tax exemption because all their assets are jointly titled and pass directly to Sue as the surviving spouse. Let’s assume the federal estate tax exemption remains at $11.58 million at the time of Sue’s death. The estate tax rate is still 40%, and Sue’s net worth remains at $18 million.
Using the concept of portability between spouses, Bob’s unused estate tax exemption of $11.58 million will be added to Sue’s estate tax exemption of $11.58 million, giving Sue a combined exemption of $23.16 million when aggregated.
Note: Sue “acquired” Bob’s unused estate tax exemption of $11.58 million and can pass on $18 million without incurring federal estate tax upon her death. Sue’s estate will owe no federal estate taxes at all.
The portability election for the estate tax exemption will save approximately $2.568 million in estate taxes for Bob and Sue’s heirs.
Frequently Asked Questions
How do I claim the exemption?
The unused spousal exemption will not automatically transfer. You must file IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, to make the election to add the unused spousal exemption to your exemption, even if the estate is not liable for tax.
When should I file the portability claim?
Form 706 must be filed within nine months of the date of death, or within 16 months if an extension to file the return is requested. Some couples may claim an exemption from this requirement if the estate is not required to file a tax return because its value does not exceed the exemption. Consult a tax attorney to see if you qualify.
What is the estate tax exemption for 2022 and beyond?
The Tax Cuts and Jobs Act (TCJA) effectively doubled the federal estate tax exemption in 2018. It was $5.49 million in 2017, $12.06 million in 2022, but the TCJA expires at the end of 2025, so the exemption could drop to about half its value at that time unless Congress takes steps to renew the legislation.
Source: https://www.thebalancemoney.com/what-is-portability-of-the-estate-tax-exemption-3505672
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