What is Portability in Estate Planning?

Under the Tax Cuts and Jobs Act, portability became a potential option for people with larger estates when dealing with the second-headed monster of estate planning. As I have previously explained in my videos and articles, the second-headed monster of estate planning is the estate death tax. The concept of portability deals more with federal estate death tax than state estate death tax.

Portability is a benefit that can double the estate tax exemption for the surviving spouse of a married couple. Currently, the estate tax exemption is 11.7 million dollars. This means if you die tomorrow and have an estate greater than 11.7 million dollars, the internal revenue service will be looking to charge your estate a federal tax for any dollar over the 11.7 million.

However, if you are married, and your spouse has already passed away, you can get their exemption or whatever remains of their exemption passed to you so that you can utilize it when you pass away in addition to your own exemption.   This allows you to have an estate valued roughly at 23.5 million dollars exempted from federal estate tax. 

Here’s an example. Bill and Mary have a large estate. Bill passes away first, and Bill’s exemption amount on the current tax code is 11.7 million. When Mary passes away a couple of years later, Mary’s estate can use her husband Bill’s unused exemption amount in addition to her exemption amount. This is called the deceased spouse’s unused exemption or DSUE. If Bill had an 8 million dollar estate when he passed away, then there are roughly 3.7 million dollars remaining of his unused exemption amount for Mary. 

If there is still an 11.7 million dollar exemption available at that time, then Mary’s estate will have a 15.4 million dollar exemption available. Mary’s estate attorney or tax accountants can utilize Bill’s unused exemption amount on her tax return to minimize or avoid the estate tax to the most significant degree possible. If her estate is valued under 15.4 million dollars, then it should avoid being taxed by the IRS completely. Planning needs to be done to utilize the exemption, so it is crucial to speak with an attorney before either spouse passes away.

Portability can be the solution for married couples with a large estate. Meeting with your estate planning or elder law attorney is essential to discuss if it will be for you. When you speak with them, you can also ask them about bypass tax credit shelter trust planning within a revocable trust as a permissible type of tax planning. This is another excellent option for a married couple to minimize or avoid estate tax.

A good thing to note is that the current administration has proposed lowering the estate tax exemption to possibly 3.5 million. However, the unknown is whether the concept of portability will still exist or be reduced if the exemption is lowered. 

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