Do I Need to Claim the Portability Exemption

A married person usually has concerns about making sure that they plan for their estate in a manner which leaves their surviving spouse and beneficiaries with as much of their assets as possible.   For those couples whose own high-value assets which exceed a certain amount, the Portability Exemption could be a vital part of achieving this goal.

Understanding the Estate Tax Exemption

In most instances, the estate tax will not apply to an estate due to the federal estate tax exemption.  When applied, this exemption takes most estates out of being subject to the estate tax.  The way the exemption works is by taking the gross value of your estate for the year of death, figuring out your estate tax rate, and applying the applicable estate tax exemption.  Any amount which exceeds the exemption will be taxed.

Over the years, the exemption has gone higher while the tax rates have gone lower. As of 2018, the estate tax exemption is $11,180,000 for an individual and $22,360,000 per married couple. What this means is that if an individual were to pass away this year and his or her estate value was not more than $11,180,000 not one penny of this amount would be subject to estate tax.  If the value of the estate was over this amount, the excess value would be taxed.

The Portability Exemption

The portability exemption refers to a spouse’s right to claim any unused part of their deceased spouse’s federal estate tax exemption and add it to their exemption.  In other words, if one spouse dies the other spouse can use any unused portion of the deceased spouses’ estate tax exemption.   Claiming this exemption requires that the person in charge of the estate make an election on the deceased spouse’s estate tax return to transfer their unused exclusion amount to the surviving spouse. As indicated above, a married couple could potentially pass on $22.4 million to their heirs free from federal estate taxes.

Pros and Cons

One positive feature is that portability allows you to avoid the costs associated with the creation of a credit shelter trust.  It also allows the surviving spouse continued control of all assets.  Additionally, portability allows for a step-up in basis on all assets at the death of the surviving spouse.  On the downside, portability requires the cost of preparing and filing an estate tax return.  Further, portability is lost if the estate tax return is not timely filed or if surviving spouse remarries.  It also does not apply to the Generation Skipping Tax, does not allow you to shelter the appreciation of assets, provides no creditor protection for the surviving spouse, and allows the surviving spouse full control of all assets (for example, leaving those assets to a new spouse instead of your children).

In general, after weighing the positive and negative aspects, portability can be a good contingency plan.  However, a properly drafted credit shelter trust is still the preferred planning method.  Devising this kind of trust is complex and needs to be done with the guidance of an experienced estate planning attorney.  We have experience helping people plan for all aspects of their estate planning.  Please contact us by phone or online if we can help.

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