This week, I need to bring an issue to light which many people do not know about. The topic of discussion is Federal Portability, which relates to estate tax exemptions. While it’s not as important as it once was, the exemption status and rules should still be considered. New estate tax thresholds have changed the federal portability rules. Let me first explain what federal portability is and you can be more informed to judge for yourself and your family if it’s beneficial.

Federal Portability

Let me briefly explain that portability is the ability to transfer estate tax exemptions from one spouse’s estate to the other, provided that the deceased spouse’s estate doesn’t require all the exemptions. (i.e. Take a typical married couple. If the first spouse (husband) dies and the value of his estate doesn’t require all his federal exemption from estate taxes exemptions, then the unused exemptions can pass to his wife’s exemptions so she can use all available exemptions (his leftovers and her original exemptions)). The main goal is to protect against from paying estate taxes.

The topic of portability came to light through former President Barack Obama. During his
first term in 2010, he signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act or “TRUIRJCA.” This allowed for some changes to take place in the 2011 and 2012 tax years. I believe TRUIRJCA was an experiment of sorts. Three years later in 2013, President Obama signed into law the American Taxpayer Relief Act or “ATRA.” Under ATRA, portability between spouses was made permanent starting 2013 and moving forward. Interestingly enough, a few states stand out as of late:

  • Only Hawaii offers portability at the state level.
  • Maryland will begin offering portability of its state estate tax exemption in 2019.

Real World Examples

The best way to illustrate how the federal portability law affects a married couple is to run through a few examples. The first will illustrate an estate process without portability and the second adds portability.

Example 1: Without Federal Portability

Paul and Helen are married and all their assets are jointly titled. Their combined net worth is an even $8,000,000 for argument’s sake. Paul falls ill and dies within a year of diagnosis. On his death date, the federal estate tax exemption is $5,340,000. Keep in mind: portability of the estate tax exemption between Paul and Helen is NOT IN effect.

In this scenario, when Paul dies, his estate will not need to use any of his $5,340,000 estate tax exemption since all the assets are jointly titled. Additionally, a concept known as the unlimited marital deduction will allow Paul’s share of the joint assets to be automatically transferred to Helen by right of survivorship without incurring any federal estate taxes. The unlimited marital deduction definition simplified is that married couples can make unlimited transfers of property without incurring taxes, either during their lifetimes or after their deaths.

Assuming at the time of Helen’s death, the federal estate tax exemption is still $5,340,000. The estate tax rate is 40{bab1ef90a5b46e637d1367e20ae501ba54026d6fc1e74e08c58e6caf24c11e3b}, and now Helen’s estate is still worth $8,000,000.

Now, Paul’s estate tax exemption of $5,340,000 is gone. Helen can only pass on $5,340,000 free from federal estate taxes. Thus, Helen’s estate will owe $1,064,000 in estate taxes after her death. Here’s the math broken down:

An $8,000,000 estate minus the $5,340,000 exemption equals a $2,660,000 taxable estate.
A $2,660,000 taxable estate times the 40{bab1ef90a5b46e637d1367e20ae501ba54026d6fc1e74e08c58e6caf24c11e3b} estate tax rate equals $1,064,000. ($1,064,000 in taxes owed from the estate).

Example 2: With Federal Portability

Paul and Helen are married and all their assets are jointly titled. Their combined net worth is an even $8,000,000 for argument’s sake. Paul falls ill and dies within a year of diagnosis. On his death date, the federal estate tax exemption is $5,340,000. (Now 11 million and 22 million, but these figures have a ______ rule 2026.)

Assume Paul and Helen are married and have all of their assets jointly titled and their net worth is $8,000,000, Paul dies first and the federal estate tax exemption is $5,340,000 on the date of Paul’s death, and portability of the estate tax exemption between spouses is IN effect.

Their $8,000,000 estate with the $10,680,000 exemption = $0 taxable estate. The case for portability is simple and clear; it can tremendously help avoid taxes. Here’s how this is possible …

This occurs because Paul will not need to use any of his $5,340,000 worth of estate tax exemptions. Their assets are jointly titled, the unlimited marital deduction allows for the automatic transfer of Paul’s share of the joint assets to Helen by right of survivorship and (without incurring any federal estate taxes). Nothing has changed here.

At the time of Helen’s death, the federal estate tax exemption is still $5,340,000, the estate tax rate is 40{bab1ef90a5b46e637d1367e20ae501ba54026d6fc1e74e08c58e6caf24c11e3b}, and Helen’s estate is still worth $8,000,000. It’s the same facts as before. Now … enter the portability of the estate tax exemption. Under ATRA, Paul’s unused $5,340,000 estate tax exemption will be added to Helen’s $5,340,000 exemption, which gives Helen a $10,500,000 exemption. ***

Since Helen has been given Paul’s unused estate tax exemption and she can pass on $10,680,000 free from federal estate taxes at the time of her death, Helen’s $8,000,000 estate will not owe any federal estate taxes at all. Therefore, the portability of the estate tax exemption will save Paul and Helen’s beneficiaries about $1,064,000 in estate taxes.

Nota Bene
*** While we don’t live in a world where good is just handed to people, it’s there with a bit of diligence and work. With that being said, Helen won’t automatically inherit her late husband’s exemptions, just like that. She would need to file a Form 706 (United States Estate and Generation-Skipping Transfer) with the IRS. Having that on record will allow the portability law to work fluently and protect the joint estate from paying out excessive taxes upon the death of both spouses.

For questions regarding any of the topics discussed in this blog, please contact me directly at suzanne@prosperitylaw.net.

Thank you for reading,
Suzanne Poitras

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