Who Should Care and Why! 

October 2023 

You, your parents, married relatives and friends 
will likely benefit from this month’s piece. 

Estate & Gift Tax Portability 

Portability in estate planning allows the surviving spouse to add any unused estate tax exemption of the deceased spouse to their own. That means portability is a way for spouses to combine their exemption from estate and gift tax. Result: The surviving spouse’s estate and gift tax exemption is retained and augmented by the unused exemption of the deceased spouse. 

A bit of history. Portability became a reality in 2010. Prior to that, the lifetime estate and gift tax exemption were a use-it-or-lose-it benefit. When one spouse’s estate wasn’t valued to use all the lifetime exemption, the excess exempt amount was lost. Couples whose assets were primarily in the name of one spouse created a tax problem when the spouse who owned the lesser value of assets passed away first. The surviving spouse with the most assets inherited the deceased’s assets, but only enjoyed one estate tax exemption to shelter the entire joint estate from taxes.

That is in stark contrast to now when any unused lifetime estate and gift tax credit of the first spouse to pass away can be transferred and added to the surviving spouse’s exemption.

Effective January 1, 2023, the federal gift/estate tax exemption is $12,920,000. So, when someone passes away in 2023 and their estate is worth $12.92 million or less, there is no federal estate tax issues to be concerned about. Estates worth more than that are taxed on the amount that exceeds the $12.92 million threshold.

How does that affect married couples? Consider Phil and Sarah, married, each with respective net worths of $15 million and $5 million.

If Sarah passed away first in 2023, her lifetime estate and gift tax exemption is $12.92 million…meaning her $5 million estate is exempt from estate taxes. Then, if Sarah’s estate files a federal estate tax return electing to allow Phil to use that exemption, her unused estate tax exemption of $7.92 million can be transferred to Phil. His estate will have both his own exemption of $12.92 million plus Sarah’s unused $7.92 million…a total exemption of $20.84 million.

How to Obtain Portability 

It’s critical to recognize that portability is not automatic. For the surviving spouse to enjoy the added shelter of the deceased spouse’s unused exemption, two criteria must be met. First, the deceased spouse’s estate must file a federal estate tax return electing to allow the surviving spouse to use that exemption. Second, that filing is due within nine months of the deceased spouse's death. Clearly, it's important that the deceased spouse’s estate initiates the filing step in a timely manner to facilitate the surviving spouse to enjoy this enhanced exemption.

Cautions & Limitations 

A surviving spouse may only qualify for the unused estate tax exemption of the last deceased spouse. If the surviving spouse had more than one deceased spouse, only the unused exemption of the last deceased spouse will apply.

Many states have a state estate tax which does not provide for portability to apply to the state estate tax exemption. Notably, the Commonwealth of Virginia no longer has an estate tax or inheritance tax. 

Key Takeaways 

Understanding how portability works is important for people with estates that could be taxable. Many people should pay attention to the rule now, because there is talk of reducing the lifetime estate and gift tax exemption. The current exemption is scheduled to be cut in half after 2025 if Congress doesn’t act.

It's a good idea for most estates to elect the portability option … even if the federal gift/estate tax exemption of $12,920,000 seems more than sufficient to shelter a spouse’s estate. The future may result in an unexpected financial windfall, or an extended lifespan could result in significant appreciation of assets.

The single biggest takeaway is portability delivers remarkable flexibility in estate planning. 

The above presentation is meant as an overview only. 
Give us a call and we’ll quickly help you with questions.