Now that Congress has acted, we know that each of us has a $5.25 Million exempt amount to transfer during our lifetimes or at death before our estates are hit with the estate tax.
If married, that means that the two individuals together get $10.5 Million to transfer.
So, what is portability? It is a provision in the estate tax law that allows couples to take advantage of each other’s exemption, even if they do not have credit shelter trusts.
An example is this: If husband and wife have $7 Million in assets. The first to die leaves all of the assets to the survivor. At the death of the first to die, there is no estate tax as transfers between spouses are not taxed.
When the survivor dies, there is now $7 Million in assets. Since the exempt amount is $5.25 Million, there would be $1.75 Million that would be taxable. However, if upon the death of the first spouse, the Personal Representative transferred the deceased spouse’s unused $5.25 Million federal estate tax exemption to the surviving spouse, that surviving spouse would now have $10.5 Million in estate tax exemption available. As a result, the estate of $7 Million would pass to the heirs without the imposition of estate tax.
First, remember that this portability of the exempt amount only applies to spouses. Therefore, a single individual ‘s estate cannot transfer the federal estate tax exemption to a child or other family member.
Next, this does not assist when the assets appreciate. If high net worth clients place their assets in a credit shelter trust, the exempt amount for the deceased spouse is held in trust and remains exempt, even if it appreciates. Not so if the individuals are relying on portability.
Finally, timing is everything. To take advantage of this option or to “elect portability” the Personal Representative handling the estate of the spouse who died must file an estate tax return (Internal Revenue Service Form 706), even if no tax is due. This return is due nine months after death with a six‑month extension allowed.