Portability

On August 24, 2017

What is portability in estate planning?

When a person passes away, up to $5.49 million (in 2017), will be excluded from the federal estate tax. This exclusion is per person, meaning spouses each have their own exemptions, and the exclusion amount increases each year with inflation. Additionally, surviving spouses may elect to receive the unused exclusion from a deceased spouse, and ultimately receive a total exclusion of up to $10.98 million (in 2017) upon the surviving spouse’s death. This is called portability. Prior to 2011, any unused portion of a spouse’s exclusion was lost forever and portability did not exist. This was problematic for estates that exceeded the estate tax exclusion amount, because if the deceased had not implemented certain estate planning measures, his or her exclusion would be lost.

Consider the following example:

H and W are married with a total estate of $8 million. H passes away and all $8 million passes estate tax free to W. W passes away and her $8 million estate goes to her children. If W elected portability when H died, then she can pass all $8 million to her children free of estate tax. If W did not elect portability when H died, then only $5.49 million is exempt, and the remaining $2.51 million will be subject to estate tax.

Portability Rules

There are a few rules that a person must follow in order to use portability. Among other requirements, the decedent must be a U.S. citizen or a U.S. resident; the estate must file the 706 estate tax return within the required time period; and the person electing portability must be the surviving spouse of the decedent.

Late Election

The normal deadline for an estate tax return is 9 months from the date of death plus a 6 month extension if filed and granted. A late election can be granted if certain requirements are met.

Summary

Portability is a useful tool and serves an important purpose, but it does have its limitations. A 706 tax return must be timely filed to elect portability. Also, the use of trusts is often a more efficient way to use the exemptions of each spouse and can eliminate the need for portability. As with all estate planning options, you should seek a qualified professional who can counsel with you on the best solution for you and your estate.