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Portability and estate tax exemptions

May 24, 2017


Big changes were put into play in 2010 and 2013 that affected federal estate taxes. Among them was the "portability" of a recently deceased spouse's federal estate tax exemption. (For an explanation of the federal estate tax, please read this article.)


What is portability? Consider a husband who passed away in 2017, leaving a surviving wife. The federal estate tax exemption amount for 2017 is $5.49M. Because his estate was worth $1M after deductions, his estate didn't have to pay a federal estate tax. That means he had a leftover estate tax exemption amount of $4.49M (this is called a DSUE in IRS-speak). His surviving wife can elect to take his unused $4.49M exclusion amount and add it to her own when she passes away. That's portability. 


How does one take advantage of portability? Portability doesn't happen automatically. Continuing with the example above, an estate tax return for the deceased husband's estate must be filed within nine months of his passing (or nine-plus-six months if an extension is filed). If that deadline isn't met, the surviving wife's right to elect portability might be lost. So it's critically important to elect portability on time.


Examples of portability at work


   (i)  Failure to elect portability. A married couple, Tom and Susan, are worth $10M. They own their assets jointly as community property with right of survivorship. Tom passes away in early 2017. Because of how they owned their assets and the "marital deduction," Tom's estate is effectively worth $0; all of their joint assets automatically pass to Susan. Therefore, the entirety of Tom's federal estate tax exemption amount was unused. However, no one sought to elect portability of Tom's unused exemption. It's lost forever. Susan alone is now worth $10M. She passes away in late 2017 and leaves everything to her children.


The result: This will be bad for her kids. Her estate will have to pay an estate tax of up to 40% on $4.51M ($10M less her exclusion amount of $5.49M). Therefore, her kids will have lost up to $1.8M simply because portability wasn't elected.


   (ii) Portability elected. After her husband Tom passed away, Susan timely elected portability of his unused exemption amount. Now when Susan passed away later that year, her exemption amount was doubled to $10.98M. 


The result: This will be great for her kids. The entirety of her estate will be exempt from federal estate tax simply because she elected portability. Her kids are now better off to the tune of up to $1.8M.



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