Portability in Estate Planning


Estate planning involves taking inventory of what you own and preparing for those assets to be transferred to others in the proper way after you die. Debts, money, accounts, and insurance plans all make up your estate. If your estate is worth more than a certain amount, it will be subject to an estate tax.

Before portability was introduced, estate planning for married couples involved using credit shelter or bypass trusts. These would hold the remaining tax exclusion for the deceased spouse’s estate and prevent the assets from further tax once the surviving spouse passed on. If the estate tax exclusion of the deceased spouse wasn’t used fully, this amount would be lost.

But portability allows for this unused DSUE (deceased spouse’s unused exemption) amount to transfer to the living spouse. The IRS has issued rules about the portability election related to federal estate tax exemption. If you’re married, it’s important to understand how the rules can impact your current estate plan. Widowers and widows should also find out how the rules can affect the estate of their deceased spouse.

The Portability Election

The portability election is the surviving spouse’s right to claim their deceased spouse’s unused portion of their estate tax exemption, to add it to their own exemption amount. In 2018, the projected amount that can be left to your heirs free from federal estate tax is roughly $11 million per married couple. This projection, based on Bloomberg BNA estimates, means $5.6 million per spouse.

In order to make this portability election properly, the living spouse should file their federal estate tax return in a timely manner. This is also called the “Form 706” or “United States Estate Tax Return.”

This form is due between the date of the deceased spouse’s death and nine months after. You can, however, file for a six-month extension with a Form 4768, before or on the estate tax return due date.

What Prompted these New Rules?

This change in rules came because so many individuals missed the portability election deadlines, overwhelming the IRS. Before that, executors had just nine months for the deadline to elect portability on their estate tax return. And a lot of them didn’t even know this election existed for them, particularly if they were dealing with an estate they didn’t know qualified.

As soon as these people realized they had missed the date and still wanted relief, they would need to go through the time-consuming, expensive process of a PLR (or private letter ruling). Due to so many requests for relief, the IRS had to make the rules simpler.

Specifications for the New Rules

The new rules for 2017-34 Revenue Procedure come with a few specifications you should be aware of:

  • This procedure only applies to taxpaying citizens who passed on in 2011 or after.
  • If you did file a return but didn’t elect portability, it doesn’t apply to your situation. In that circumstance, the estate must seek relief with a PLR and through the IRS.
  • It only applies if you had an estate that didn’t call for an estate tax return due to having a value under the necessary threshold.

Should You Rethink Your Estate Planning?

In 2010, the lifetime exclusion went up to $5 million, meaning that there was a significant decrease in the number of estates subject to estate tax liability. Between spouses, the present combined exclusion amount has led many people to rethink their estate plan strategies.

A common question is whether or not you’ll still need an AB trust when the rules of portability allow you to transfer an unused exclusion.

“So has portability of the estate tax exemption led to the extinction of AB Trusts? Not exactly,” said Julie Garber, estate planning attorney and contributor at The Balance. “If the spouses have different sets of final beneficiaries, such as in the case of a second or later marriage where each spouse has their own children that they want to inherit their separate assets after both spouses are deceased, then the couple will want to make use of AB Trust planning in order to ensure that their separate beneficiaries will be their ultimate beneficiaries.”

Plus, a lot of states in the U.S. levy estate tax on their own terms. For instance, Massachusetts subjects an estate to estate taxes only if it exceeds $1 million. And the exclusion isn’t portable between you and your spouse. You must use it or it will be lost. If your state has its own estate tax rules, you may still need an AB trust.

The Benefits of Portability

The bottom line is that married couples must look past individual exemption amounts when approaching the subject of estate taxes. Portability, in essence, means taking the exemption limit of your spouse and adding it to yours. Married couples can basically end up with a tax exemption limit double the individual limit, through portability.

The portability concept is still pretty new in estate planning law and has only entered the scene less than a decade ago. It’s become both a blessing (for saving taxes) and an inconvenience (because it means yet another change in the rules). So can this relatively new change be of benefit to you and your loved ones?

Portability can save you thousands in gift taxes and estate taxes if your spouse passed on within the past few years. Although specifications will differ from case to case and the only way to know for sure is through contacting a professional, portability can potentially lighten the load of estate taxes for you and yours. Just remember that portability doesn’t happen automatically, regardless of the new rules, and that you need to take action.

Call our Estate team at (480)467-4325 to discuss your case today.

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