The Estate Planning Toolbox: Portability Election

15 Aug

With the passage of the American Taxpayer Relief Act of 2012, the portability election for the estate and gift tax exclusion became permanent.  While portability was available in 2011 and 2012, it was not until 2013 that it became a permanent fixture and changed the estate planning landscape for married couples.  The portability election can be an extremely important tax saving tool and it should be a serious consideration after the death of a spouse.  This post will briefly describe what portability is, how it works, and the benefits of it.


To understand the procedure and significance behind the portability election, it necessary to first understand the estate and gift tax exclusion (also known as the unified credit).  The exclusion allows individuals to gift during life, or transfer at death, a certain amount of assets free of estate and gift tax at the Federal level.  For the 2013 year that amount is $5.25 million for each individual.  When the total amount of assets gifted during life and/or transferred at death have exceeded the exclusion amount, the individual would then owe estate and/or gift tax to the IRS.


The portability election allows married couples to maximize the usage of their individual exclusion amounts.  It arises in situations where there is a married couple, the first spouse passes away (deceased spouse), and the spouse that is still alive (surviving spouse) makes an election to preserve any unused portion of the deceased spousal unused exclusion (DSUE).  Explaining this process is easier illustrated through an example:


Walter and Skyler are a married couple.  Skyler dies in 2013, when the applicable exclusion amount is $5.25 million.  Skyler did not gift any assets during her life and has separate property of $2 million at death.  Skyler has a DSUE of $3.25 million.  Walter makes the portability election and transfers the DSUE to his exclusion amount, expanding his current $5.25 million to $8.5 million.  Walter later dies and the exclusion amount is still $5.25 million.  Walter has $8 million in assets.  Instead of having to pay estate tax on the amount in excess of the exclusion ($2.75 million), his estate is now free and clear of Federal estate tax because he made the portability election and his total assets are less than his adjusted exclusion amount of $8.5 million.


This election process is fairly simple, as the executor for the deceased spouse just has to file a timely estate tax return (Form 706).  This process must be done even if no estate tax is due.  Although having to file the return may be an inconvenience, it is minor compared the potential tax savings down the road.  Even if the surviving spouse does not think the estate and gift tax will ever come into play because they are well under the exclusion amount, it is still a good idea to make the election just in case.  Both the law and life are uncertain, as the exclusion amount could decrease before the surviving spouse passes away or the surviving spouse could come into a big inheritance.


This post is provided for informational purposes only and does not constitute legal advice.  It is intended, but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as an indication of future results.  It is not intended to create an attorney-client relationship and is offered only for general informational and educational purposes.  You should not act or rely on any information contained in this website without first seeking the advice of an attorney.

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