Portability is often used by high-net worth families to reduce or eliminate federal estate taxes when the second spouse dies. When a spouse passes away, the surviving spouse can utilize the unlimited marital deduction and inherit the dying spouse’s assets without incurring any federal estate tax liability.
Currently in 2022, there is a combined exemption allowed for each person to bypass federal estate tax liability in the amount of $12.06 million. This means that any gifts you make during your lifetime combined with what transfers via your estate after you die can total up to $12.06 million and no estate taxes will need to be paid. Any amount over $12.06 million will be taxed at approximately 40%. This current exemption protects 98% of families. Only the wealthiest 2% end up owing federal estate taxes currently. That will change at least by the end of 2025, possibly sooner if Congress takes action.
The current $12.06 million per person exemption will continue to adjust annually for inflation until 2026. In 2026, the exemption is predicted to drop to $6.5 million per person. This is how portability comes into play. It is a protective strategy to safeguard against future reductions in the estate tax exemption.
How does Portability Work?
Prior to 2011, one spouse could create a credit shelter trust which would allow the unused estate tax exemption of one spouse to transfer to the surviving spouse. In 2011, the IRS revised its rules so that it was no longer necessary to create this credit shelter trust. It simply allowed the administrator of an estate to file a timely federal estate tax return claiming portability of the unused exemption. Even though the marital deduction was being used and no estate tax was owed, the administrators were required to file this tax return within 9 months of the date of death to preserve the portability of the unused estate tax exemption from the decedent and transfer it to the surviving spouse.
In 2017, the IRS simplified the process further by allowing the administrator to request an automatic extension of time to file the estate tax return which makes the portability election for up to 2 years from the date of death. This still required a filing and the IRS was routinely granting these extensions. Just last month, the IRS made a new update which gives estate administrators the ability to request an automatic extension of up to 5 years from the date of death to file the return and elect portability.
Filing this estate tax return and electing portability is a good idea for many surviving spouses because of the unknown changes that will occur at some point to the tax exemption amounts. While many couples may think they will not need all of this extra exemption, if the exemption amount decreases that may no longer be the case. Preserving portability is wise for couples of any age and any current net worth. You cannot predict what type of windfalls may occur later and you may need this extra protection.
The Impact of Remarriage
Also, an important point to note is that if you are a surviving spouse and you choose to later remarry, you will lose the right to your prior spouse’s unused exemption even if you took the correct steps to file for and preserve portability.
If you are a surviving spouse and want to know your portability rights, contact the estate administration attorneys at Stouffer Legal. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.
