Bay Area Estate Tax Lawyer Answers, “What Is Portability in an Estate Plan?”

Federal estate tax law includes a provision called portability. This provision only applies to married couples. It allows the surviving spouse to use any part of their deceased spouse’s unused estate and gift tax exemption.

Including portability in an estate plan protects the surviving spouse from significant estate tax bills if the deceased spouse’s estate didn’t exceed exemption thresholds. With the deceased spouse’s unused exclusion (DSUE), the surviving spouse can transfer their spouse’s unused federal gift or estate tax exemption upon death.

Who Pays Estate Taxes?

 Assets included in your estate when you die are subject to taxes. Your assets can include stocks, real estate, cash, and other property of monetary value. Depending on the laws where you live, you might owe only federal or state estate taxes. In some situations, you could owe both.

The Internal Revenue Service calculates a person’s estate tax using a specific formula. The formula combines a base tax with a person’s marginal rate. Your appointed executor must pay any owed estate taxes before distributing assets to your named beneficiaries.

Understanding Estate Tax Exemptions

 Your estate doesn’t automatically pay taxes when you die. The government allows for certain exemptions under federal law. For example, part of your assets can transfer to designated beneficiaries without tax consequences.

The estate tax exemption in 2022 is $12.06 million for individuals (which works out to $24.12 million for married couples). If your estate’s value falls below the maximum limit, your assets won’t be subject to federal estate taxes. However, if the value of your estate exceeds the limit, your estate must pay taxes on the amount above the exemption limit.

The Impact of Portability on an Estate Plan

 Since portability only applies to married couples, beneficiaries receiving assets as individuals cannot use this particular tax exemption. The surviving spouse can transfer the unused portion of the deceased spouse’s estate tax exemption, and their estate can benefit from a combined exemption upon their own passing.

In that case, portability might also protect beneficiaries of the surviving spouse’s estate if they used their deceased spouse’s unused estate tax exemption. When the surviving spouse dies, their estate would not have to pay estate taxes if the value of the estate is still below the combined exemption threshold. This would leave more assets for the beneficiaries.

How to Claim Your Spouse’s Exemption

 Just being married doesn’t mean you will automatically receive your spouse’s exemption when they die. You must follow specific steps to use the portability provision.

You must file an estate tax return with the Internal Revenue Service. In July of 2022, the rules changed allowing the surviving spouse five years to file forms related to a portability-only election.

Portability also doesn’t allow you to receive all of your deceased spouse’s estate tax exemption. You are only entitled to what’s remaining of their exemption. For example, if your spouse gifted part of their estate to someone while alive, that gift will count against the exemption when they die, along with any other assets in their estate.

Speak to a Bay Area Estate Tax Lawyer About Portability Today

 Contact a Bay Area estate tax lawyer if you want to learn more about the portability provision. We can help you make sure your spouse can use the deceased spouse’s unused exemption in the appropriate timeframes. Simply contact our law firm at 408-889-1290 to schedule a consultation.