This is a written summary of the availability of “portability” under the federal estate tax laws.
“Portability” refers to the process of transferring a deceased spouse’s unused federal estate tax exclusion or exemption to the surviving spouse. This allows the surviving spouse to add the deceased spouse’s unused exclusion to their own personal federal estate tax exclusion thus allowing the surviving spouse to increase the amount they can transfer on their death, without incurring federal estate tax.
Currently, the federal estate tax rate is 40%. As a general rule, all assets a person owns at the time of their death are subject to federal estate tax. The federal estate tax exclusion is $11,180,000 for taxpayers that passed away in 2018 and $11,400,000 for taxpayers that passed away in 2019. The amount is adjusted for inflation each year. Thus, estates that are smaller than the federal estate tax exclusion will not be subject to federal estate tax.
Unfortunately, portability is not automatically applied whenever a spouse dies with an estate less than the current federal estate tax exemption. In order to receive portability, the estate of the deceased spouse must file a federal estate tax return to elect portability. This is true even if the value of the first spouse’s estate is less than the federal estate tax exclusion. Note there are typically professional fees charged for preparation of a federal estate tax return.
A word of caution is in order. Some people acting as Trustee or Personal Representative of the decedent’s trust or probate estate are opting not to make the portability election under the belief the surviving spouse’s estate will never grow large enough to be subject to federal estate taxation. It is important to consider the following factors when deciding whether to elect portability:
- It is possible that Congress could reduce the estate tax exclusion amount. This may create a more compelling need to have the deceased spouse’s unused exclusion to reduce or eliminate federal estate taxes;
- It is possible the surviving spouse’s estate could grow at a faster rate than anticipated. This could be the result of an unanticipated inheritance, a sale of a business, or gambling and lottery winnings, to name just a few;
- It is possible the surviving spouse lives significantly beyond their standard life expectancy, thus increasing the amount of time for assets to grow at market rates well in excess of the rate of inflation.
- The typical due date for filing a federal estate tax return is on the nine month anniversary of the date of death of the deceased spouse. A six month extension is possible. If the size of the decedent’s estate is large enough to trigger the mandatory requirement to file a federal estate tax return, the deadline to elect portability is the same. However, if the size of the decedent’s estate is not large enough to trigger the mandatory requirement to file a federal estate tax return, the deadline to just make the portability election is on the two year anniversary of the date of death of the deceased spouse.
The decision whether to make the portability election will typically involve an analysis of the risks, benefits, and costs.