Tax portability is a helpful tax benefit that should be considered when crafting your estate plan. The option of portability can make a significant difference when it comes to taxation of an estate. Two important aspects to remember are that the portability exemption is only available to married couples and only applies to Federal estate taxes. You will want to be aware that portability may not be the right decision for your situation if, for example, you choose to divide your assets because of a divorce, remarriage, or other circumstances.
Estate tax portability allows the executor of an estate to exercise the option on behalf of the deceased’s spouse, to allow that spouse to use any available estate tax exemption amount that hasn’t yet been used at the time of the taxpayer’s death. Meaning, the amount of the estate tax exemption that was not used for the deceased spouse’s estate can be transferred to the surviving spouse if the first spouse dies and the value of their estate doesn’t use up the entire exemption. The surviving spouse can use the deceased spouse’s unused estate tax exemption plus their own exemption when the surviving spouse later dies. The surviving spouse would therefore be able to shield $22.8 million from the 40% federal estate tax when it passes to heirs upon death, instead of $11.4 million. Taxable estates that exceed the exemption amount will have the excess taxed at a flat 40% rate.
In order to benefit from this exemption, however, the surviving spouse must file IRS Form 706, the United States Estate and Generation-Skipping Transfer tax return, within nine months of the first death in order to elect portability.
The federal estate tax exemption is indexed for inflation, so it increases periodically, usually yearly. It currently stands at $11.58 million for deaths occurring in 2020, which is up from $11.4 million in 2019. Additionally, when 2025 arrives, the estate tax exemption amount is scheduled to return to pre-2018 levels (though portability will continue for those who have exercised the option prior to 2025).
Thanks to the annual federal gift tax exclusion ($15,000 for 2018 and 2019), both you and your spouse can make annual gifts to a single recipient up to that amount and reduce the taxable value of your estate without reducing your unified federal estate and gift tax exemption. Additionally, as long as your spouse is a U.S. citizen, you can give him or her an unlimited amount while alive or leave him or her an unlimited amount via a bequest upon your death free of any federal estate or gift tax.
While this part of the estate planning decision is made after someone’s passing it is important to ensure your estate planning documents contemplate this possibility and address your wishes. To speak with an estate planner today contact Revolution Law Group at 336-333-7907.