In a world of computers that fit in your pocket and phones on your wrist, "portability" is all the rage. And for the last six years, it has been all the rage in estate planning circles as well — except "portability" in this context has nothing to do with how small something is.
What is estate tax portability?
As of January 1, 2018, the estate tax exemption for individuals is $11.18 million, adjusted for inflation. In other words, if your assets are worth $11.18 million or less at the time of your death (and you have not used any of your combined estate and gift tax exemption), your estate owes no estate tax.
But upon the death of the first spouse, the surviving spouse can elect to use the deceased spouse's unused exemption amount (also known as "DSUE"), effectively doubling the estate tax exemption for married couples to $22.36 million. This election is known as estate tax portability.
If you read that last paragraph closely, you probably noticed that there is a big if when it comes to portability: the surviving spouse can use the DSUE if the decedent's estate elects to do so.
To make a portability election, the decedent's estate must file IRS Form 706, which is the "United States Estate (and Generation-Skipping Transfer) Tax Return." On that form, the estate can elect to transfer the DSUE to the surviving spouse.
While somewhat confusing, the form offers helpful instructions for completing and filing the return. For further guidance, we recommend you consult a tax professional.
When should an estate elect portability?
A decedent’s estate is required to file Form 706 when the gross estate plus adjusted taxable lifetime gifts (over the annual exclusion amount) exceed the applicable exemption amount.
However, where the surviving spouse's estate is not large enough to benefit from portability right now, the decedent's estate may still want to file a portability election just to be safe. The surviving spouse could receive an inheritance, increase the value of their assets, or remarry a wealthy individual — any of which could bring the surviving spouse's estate above the estate tax exemption amount.
There is also the possibility that the federal estate tax exemption will drop in the future. (The current $11.18 million individual exemption will sunset at the end of 2025, unless Congress extends it.)
Discuss portability with an estate planning attorney.
The bottom line is that portability can dramatically impact estate tax liability and should be considered after a spouse's death. To discuss your estate plan and learn how to minimize or avoid estate taxes, contact the experienced Oklahoma City estate planning attorneys at Postic & Bates today for a free, no-obligation consultation.
David M. Postic is an associate attorney at Postic & Bates, P.C. His practice includes estate planning, probate, real estate, adoption, business law, and litigation.
You can email David through our Contact Us page or by calling our office at (405) 691-5080.
[As with all our posts, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]