Estate tax exemption or portability for surviving spouses

Estate tax exemption or portability for surviving spouses

Share This Post:

What is Estate tax exemption?

When a person dies leaving valuable estate, the estate may be charged a tax known as estate tax. Notably, not all estates are subject to estate taxes; it depends on the total value of the estate, whether it passes a threshold.

Estate tax exemption is that threshold amount below which an estate tax will not be charged on the estate. That is, if the entire estate value is below this threshold amount, the estate will not be taxed. But if it is larger than the exemption amount, then an estate tax will be imposed.

There are two types of estate taxes:

  • Federal estate tax
  • State estate tax.

State estate tax

This tax is payable to the state in which the estate is located. Not all states impose estate taxes. In fact, it is only found in 12 US states. And interestingly, the amount varies among the states.

In New York, the estate tax exemption amount for deaths in 2021 is $5.93 million for a single individual. For a couple, their individual exemption amounts are added up together to give their joint exemption amount.

Federal estate tax

The federal estate tax is just like the state estate tax, but payable to the federal government. It binds all estates regardless of the state. Furthermore, the federal estate tax exemption amount is fixed at $11.7 million for deaths in 2021 for a single individual. For a couple, their individual amount are also added up, giving $23.4 million as their total exemption amount.

Portability of estate tax

Now portability is a legal provision that allows a surviving spouse to add the unused part of their late spouse’s exemption amount to their own. The portability election, however, must be made in the federal estate tax return form which must be filed on time.

Let us now take a visual example to understand the portability concept.

Let’s assume a couple has $12 million. The husband and wife each has an equal part of the estate, that is $6 million each. Obviously they’re individually and jointly exempt from federal estate tax.

But then, the husband dies in 2021, leaving his half of the estate to the surviving wife. The wife now has a total of $12 million to her name. Now, this amount exceeds the federal exemption amount for an individual, which is $11.7 million. But that is where portability comes in.

Since the deceased husband’s estate of $6 million was below the threshold, it means his exemption amount was unused. This amount is called “deceased spouse’s unused exemption amount” (DSUEA). Hence, his entire unused exemption amount of $11.7 million will be ported to the wife, to make hers $23.4 million. Now, this new exemption amount is more than her estate value of $12 million. She is, therefore, now free of federal estate tax because of portability!

The portability must be selected on time

To enjoy the benefits of estate tax exemption portability, the surviving spouse must make the portability election on time by filing the federal estate tax return IRS Form 706 within 9 months of the death. If not, there will be nothing like portability. She would have $12 million but her estate tax exemption amount would still be for a single, which is $11.7 million. It means her estate is liable to federal estate tax.

Portability only works with federal estate taxes

It is important to know that portability is only associated with federal estate tax. It cannot be used for state estate tax, with the exemption being Hawaii and Maryland. These two states offer portability of their state’s estate tax exemption as at 2021.

History of Portability

Portability as a legal concept was introduced to protect married couples. It was during the time of President Barack Obama, who signed the American Tax Payer Relief Act (ATRA) into law on January 2, 2013. Before long, ATRA made the concept a permanent feature if the federal estate tax law.

It is permanent in the sense that it will continue to hold until Congress takes action to revoke it. Also, by being permanent, it doesn’t have to be renewed yearly.

Are you looking towards tax savings so that your loved ones can get the most out of your estate? Why not talk to an attorney near you?

An estate planning can help you plan towards estate tax minimization. Get in touch with an estate planning lawyer near you.

DISCLAIMER: The information provided in this blog is for informational purposes only and should not be considered legal advice. The content of this blog may not reflect the most current legal developments. No attorney-client relationship is formed by reading this blog or contacting Morgan Legal Group.

Got a Problem? Consult With Us

For Assistance, Please Give us a call or schedule a virtual appointment.