What is Portability in Estate Planning?
In the realm of estate planning, portability refers to the ability of a surviving spouse to utilize any unused portion of their deceased spouse’s estate tax exemption. Introduced under the American Taxpayer Relief Act of 2012, portability has become a crucial tool for married couples to maximize their estate tax exemptions and preserve wealth for future generations.
Historically, each individual had their own estate tax exemption, which is the threshold at which their estate becomes subject to federal estate taxes. However, any unused portion of this exemption would be lost when the individual passed away. This often resulted in the unnecessary payment of estate taxes that could have been avoided if the exemption had been fully utilized.
Portability, on the other hand, allows a surviving spouse to claim the unused portion of their deceased spouse’s exemption. This means that when the second spouse passes away, their estate can effectively utilize both their own exemption and the unused portion from their deceased spouse, effectively doubling the estate tax exemption available to them.
This concept of portability greatly benefits married couples, particularly in situations where one spouse has a larger estate than the other. For example, let’s say that the estate tax exemption is $11.7 million (as of 2021) and one spouse has an estate worth $5 million while the other has an estate worth $2 million. The first spouse to pass away would not utilize their full exemption, resulting in $6.7 million of unused exemption. Through portability, the surviving spouse can add this $6.7 million to their own exemption, thus creating a combined estate tax exemption of $18.4 million that can be passed on tax-free to their beneficiaries.
Overall, portability plays a crucial role in estate planning when it comes to maximizing tax efficiency and preserving wealth for future generations. By taking advantage of this provision, married couples can ensure that as much of their estate as possible is passed on to their chosen beneficiaries without being eroded by hefty estate taxes.
FAQs:
1.
Who is eligible for portability?
Portability is available to the estates of married individuals where both spouses are either U.S. citizens or residents.
2.
Is portability automatic?
No, portability is not automatic. To claim the unused portion of the deceased spouse’s exemption, the executor of the deceased spouse’s estate must timely file an estate tax return.
3.
Is portability permanent?
Portability is currently a permanent provision of U.S. estate tax law, but it is worth noting that tax laws can be subject to change.
4.
Can portability be used for generation-skipping transfer tax?
Yes, portability can be utilized to increase the generation-skipping transfer (GST) tax exemption for both spouses.
5.
Can portability be applied to state estate taxes?
Not all states adopt the federal estate tax provisions, including portability. Therefore, the availability of portability for state estate taxes depends on the laws of each individual state.
6.
What if the surviving spouse remarries?
The portability provision only applies to the most recent predeceased spouse. If the surviving spouse remarries, the unused exemption from the previous spouse is lost.
7.
Do both spouses need to have a taxable estate for portability to be beneficial?
No, even if one spouse has a taxable estate and the other does not, portability can still be advantageous as it allows the surviving spouse to utilize the unused exemption.
8.
Can portability be used for gift tax?
No, portability applies solely to the estate tax exemption and cannot be used to increase the gift tax exemption.
9.
Does portability apply to same-sex marriages?
Yes, portability applies to legally recognized marriages, including same-sex marriages, provided that the other eligibility criteria are met.
10.
Is portability available for non-resident aliens?
No, portability is only available for U.S. citizens and residents.
11.
What happens if the estate tax exemption decreases in the future?
If the estate tax exemption is reduced in the future, the unused portion from the first deceased spouse remains fixed at the time of their death. The surviving spouse can still utilize this fixed amount, regardless of any subsequent changes to the exemption.
12.
Can portability be used more than once?
Portability can only be used once for each individual. Therefore, if a surviving spouse remarries and subsequently passes away, the unused exemption from the previous spouse cannot be carried over again.