Estate Tax Portability - 5 Things You Need to Know

Posted by Daniel LaForge on Jul 11, 2017 8:00:00 AM
Daniel LaForge
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The IRS recently released an update to its federal estate tax regulations, relaxing the rules on making a late portability election to a descendant's estate.

Currently, the federal estate tax exemption is $5.4 million, meaning that when a person dies, they will only pay federal estate tax (up to 40%) if the value of their estate exceeds $5.4 million. In 2011, the IRS introduced a concept called 'portability' to the federal estate tax exemption, and has now added an additional rule to allow for a late portability election. Here's what you should know:

  1. What does portability mean?
    In general terms, portability of the federal estate tax exemption means that the estate tax exemption can be shared between spouses. More specifically, it means that if the first spouse dies, and the value of their estate does not require the use of all of their estate tax exemption, whatever amount is left can be added to the estate tax exemption of the surviving spouse.
  2. What are the benefits?
    By taking advantage of portability, a married couple is able to shield almost $11 million of their estate from federal estate tax. For example, let's say that John and Jane Doe's estate is worth $8 million, and everything is jointly titled. When John passes away, none of his $5.4 million exemption will be used, due to the use of the unlimited marital deduction. Without portability, at the time of Jane's death, she would only have her own $5.4 million exemption, which would leave $2.6 million of the estate subject to 40% federal estate tax. However, by taking advantage of portability, Jane would inherit John's unused $5.4 million exemption after his death, bringing her total exemption amount to $10.8 million. This would cover the entire $8 million estate—no estate tax would be due upon her death.
  3. Will my remaining estate tax automatically be transferred to my spouse?
    No. In order to transfer any remaining exemption amount, your spouse will need to file IRS form 706 after your death.
  4. What is the deadline to file?
    To transfer the estate tax exemption, form 706 must be filed (including the portability election) within 9 months of the date of the first spouse's death. You can also file for a 6-month extension.
  5. If the deadline to file has passed, can I still file for portability?
    Yes, the most recent law changes allow for a late portability election—meaning that if your spouse passed away after 2010, you may still be able to file for portability. The deadline to do so is the later of January 2, 2018, or the second anniversary of their date of death.

Your CPA and attorney can help you review your estate plan in light of the new changes. If you have any questions about estate tax, exemptions, portability, or filing late, leave a comment below, or feel free to contact me anytime.

Topics: Estate Tax, Tax