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Estates & Trusts

What is Portability and How Does it Impact Your Estate?

By February 21, 2017No Comments

The IRS currently allows an individual to exclude $5.49 million from their taxable estate. Married couples are able to exclude $10.98 million from their estate using a concept called portability. The IRS issued permanent regulations regarding the allowable estate exclusion amount as well as the portability of a deceased spouse’s unused portion of this exclusion. As a surviving spouse with assets above these thresholds, this guidance is essential to your estate plan.

Estate tax is imposed on the value of a decedent’s assets at date of death. It is increased by any taxable lifetime gifts and decreased by various deductions. The lifetime exclusion amount for 2017 is $5.49 million per person. Prior to the 2010 Tax Relief Act, it was possible for married couples to waste the exclusion amount applicable to the first spouse when he/she passed away if the taxable estate was less than the lifetime exclusion amount. The 2010 act introduced the idea of portability regarding the deceased spousal unused exclusion, or DSUE, amount. By making the portability election, the surviving spouse is able to apply the decedent’s DSUE amount to the surviving spouse’s own transfers during life and at death. The concept of portability was made permanent by The American Taxpayer Relief Act of 2012.

After the passing of the first spouse, the executor of the estate should typically make a portability election which passes on a decedent’s unused gift and estate tax exclusion to the surviving spouse. In order to elect portability for the benefit of the surviving spouse, an estate return must be filed at first death even if the value is below the threshold for filing. The election is only valid if the estate tax return on which the portability election made is “complete and properly prepared” as well as filed in a timely manner.

The portability election comes into effect as of the date of death of the deceased spouse. As a result, the DSUE amount may be taken into account and applied against any gifts made by the surviving spouse after the date of death of the deceased spouse. The DSUE is used first before the surviving spouse uses their own exclusion amount.

Example:

Betty dies in 2012 with a taxable estate of $3 million. In 2012 the estate tax exemption was $5.12 million. Her executor files an estate return making the portability election. Betty’s husband Tom, who has not made any lifetime taxable gifts, dies in 2017 with a taxable estate of $10 million. The executor of Tom’s estate computes Tom’s DSUE amount as Betty’s basic exclusion amount ($5.12 million) less her taxable estate ($3 million), or $2.12 million. Accordingly, the total applicable exclusion amount available to Tom’s estate is $7.61 million: his own basic exclusion amount of $5.49 million, plus the $2.12 million DSUE amount from Betty’s estate.

The portability election should be reviewed and considered as part of your overall estate planning strategy. If you need assistance or have any questions regarding portability, please contact your L&B professional at (858) 558-9200.

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