Portability election refers to the right of a surviving spouse to claim the unused portion of the federal estate tax exemption of their deceased spouse and add it to the balance of their own exemption. To elaborate, it is an estate and gift tax provision allowing the personal representative (the person in charge of the estate) of a deceased spouse to make an election on the decedent’s estate tax return to transfer the deceased spouse’s unused exclusion amount to the surviving spouse. For example, in 2017 the federal estate tax exemption was $5.49 million per person; with portability election, this meant that a married couple could potentially pass on $10.98 million to their heirs free from federal estate taxes. (Note that the recent change in the tax law effectively doubled these numbers. Now the exemption is $11.2 million for an individual and $22.4 million for a married couple).
To properly make the portability election, the surviving spouse must timely file a federal estate tax return, known as the “United States Estate (and Generation-Skipping Transfer)Tax Return” (or Form 706). Form 706 is due on or before nine months after the deceased spouse’s date of death, but an automatic six-month extension to file the return can be requested by filing an “Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes” (or Form 4768), on or before the due date of the estate tax return.
Initially, portability was hailed by Congress as a post-death planning tool that would simplify planning. However, these were broad generalizations. For some couples, it may indeed function in this manner. However, for many couples, it is a lifetime planning tool, which may keep the same level of complexity in a couple’s plans or even make them more complex. In any event, it will generally be wise for couples to consider a plan that incorporates portability. Here are the pros and cons:
Pros:
- Portability allows you to avoid the costs associated with the creation of a credit shelter trust
- Portability allows the surviving spouse continued control of all assets (this may be good or bad depending on your circumstances)
- Portability allows for a step-up in basis on all assets at the death of the surviving spouse
Cons:
- Portability requires the cost of preparing and filing an estate tax return
- Portability is lost if the estate tax return is not timely filed (this is a big one, as many times the surviving spouse is grieving and is not focused on technical legal or accounting matters)
- Portability is lost if surviving spouse remarries
- Portability does not apply to the Generation Skipping Tax
- Portability does not allow you to shelter the appreciation of assets
- Portability provides no creditor protection for the surviving spouse
Generally speaking, after weighing the pros and cons, portability is a good back-up plan if a couple has not put together their own comprehensive estate plan. But a properly drafted credit shelter trust is still the preferred planning method. The nuts and bolts are complex and are best discussed in your individual context with an experienced estate planning attorney. Our office has experienced and knowledgeable attorneys who can help you examine your options and plan for the future of your family. Please contact us online or by phone at (517) 548-7400 in Livingston County and (586) 751-0779 in Macomb County if we may be of assistance.