Attorney & Mediator
Attorney & Mediator

Estate Tax and Portability – What is it?

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.

Estate Tax and the Fiscal Cliff?

While we were getting dangerously close to flying over the fiscal cliff, those in the estate planning sector were watching closely.

The estate and gift tax, which taxes what you own and pass on to others either during your lifetime as a gift, or at death as a bequest, was in flux.  At the end of 2012, the tax which gave every individual a $5 Million exempt amount prior to the imposition of tax, was in danger of reverting to $1 Million per person.  Additionally, the tax rate would have gone up to 55%.

Many may think that $1 Million is a sufficiently generous amount.  However, it would have had adverse affects upon many family owned businesses and farms.  These individuals don’t live like the wealthy, however, the value of their businesses or farms, which include all of their equipment, would have placed their estates over $1 Million.  In such an instance, the family would then, upon the death of the owner, have to sell the business or farm because they did not have enough money to pay the estate taxes due.

In the end, lawmakers preserved the $5 Million exempt amount per person but did change the tax rate from a maximum of 35% to 40% on the amounts over the exempt amount.

So, who’s estate is now taxable?  For taxpayers dying in 2013, the estate tax exclusion amount as adjusted for inflation is now $5.25 Million per person.  For all amounts over that, the estate tax will be levied at a maximum rate of 40%.