What Is Estate Tax Portability?
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What Is Estate Tax Portability? | NOVAEstateLawyers.com

A couple can accumulate numerous assets over the course of their marriage, and when one spouse dies, the other will typically inherit those shared assets. Depending on the size of the estate, you may wish to take advantage of estate tax portability, which allows a spouse to assume the tax exemption of their deceased spouse on top of their own.

Estate tax portability can be a useful tool for couples who are creating estate plans and have a lot of assets between them, and is something to be mindful of when you’re estate planning. Here’s what you need to know about this important component of estate planning.

How does estate tax portability work?

The federal Estate Tax, commonly referred to as “the death tax,” is a tax on a person’s right to transfer property upon their death. Electing to use estate tax portability makes a significant difference in your federal estate tax liability.

Each year, the government sets a tax exemption limit, or exclusion amount, for estates under a certain size. Currently, the limit is set at $11.58 million in combined assets for a decedent who dies in 2020, and is expected to remain at this level until at least 2025. In other words, if you and your spouse’s total assets are worth $11.58 million or less at the time of the first spouse’s death, your estate will not have to file an estate tax return.

Upon the death of their spouse, the survivor can elect estate tax portability and use the deceased spousal unused exclusion, which would double the total tax exemption to roughly $23.16 million dollars. This means that once both spouses have passed, the surviving spouse’s estate won’t be federally taxed if its value is less than that combined exemptions.

Here is a simple example of how estate tax portability works and can benefit a surviving spouse: Sam and Diane are a married couple with jointly-titled assets worth $20 million. Sam dies in 2020, when the federal estate tax exemption is $11.58 million. If Diane elects to use Sam’s unused tax exemption, she’ll have an exemption of $23.16 million and can pass on what remains of their $20 million joint estate upon her death, without being subject to any federal estate taxes.

It’s important to note that estate tax portability only applies to married couples and cannot be transferred to next of kin or anyone else.

Deceased Spousal Unused Exclusion (DSUE) process

Any unused exclusion amount that is claimed by the surviving spouse is called the deceased spousal unused exclusion (DSUE). But portability of this unused amount doesn’t happen automatically when one spouse dies. The widowed spouse must file IRS Form 706 at the time of their spouse’s death to add to their unused exception.

The form must be submitted no more than nine months after the deceased’s death. If more time is required, the estate can file for an extension for up to six months. If the estate did not file a tax return form within the nine-month period or six-month extension period, the availability for a widowed spouse to elect portability of the DSUE amount depends on whether the estate has a filing requirement.

When should we elect portability?

If you don’t currently have a large net worth, you may not feel obligated to file for the DSUE. However, a surviving spouse should still apply for it just in case. The federal government is scheduled to revert the estate tax exclusion back to its pre-2017 amount of $5 million (adjusted for inflation) in 2026. If the surviving spouse dies after that time and has not applied for the DSUE, any combined assets over $10 million will be subject to federal estate taxes.

Another possibility is that the surviving spouse could receive a large inheritance from another family member or receive profits from business or investments, which would increase their net worth at the time of their death.

Get help from an experienced estate planning attorney.

Estate tax portability is a complicated matter, and many couples may not consider it when creating or updating their estate plans, or during the probate process after one spouse has died. If you think you and your spouse might be able to benefit from estate tax portability, or if you have recently lost a spouse, it may be a good idea to speak to an experienced Virginia estate planning attorney to learn more about estate tax portability and your overall estate planning needs, contact The Law Office of Patricia E. Tichenor for a free consultation.