What Is Estate Tax Exclusion Portability?

People who have been very successful financially must consider the impact of the federal estate tax. This tax carries a 40 percent maximum rate that can significantly erode the legacy that you are passing on to your loved ones.

There is an estate tax credit or exclusion that separates those who must pay the tax from those who are exempt. In 2014, the exact amount of the federal estate tax exclusion is $5.34 million.

Under current laws there can be annual adjustments to account for inflation. For example, in 2013 the estate tax exclusion was $5.25 million. An inflation adjustment increased the exclusion to $5.34 million this year. Next year another adjustment may be applied.

Per Person Exclusion

The $5.34 million exclusion is allotted to each individual taxpayer. If you are married, you have a $5.34 million exclusion, and your spouse has his or her own $5.34 million exclusion.

A question arises: if you predecease your spouse, can your surviving spouse use your exclusion as well as his or her own?

This is the matter of portability. Prior to 2011, the estate tax exclusion was not portable between spouses. When you died, your estate tax exclusion died with you.

Many people felt as though this was unfair. Let’s say that you and your spouse are both successful professionals. Each person in the marriage contributed to the family wealth over a number of decades. In addition to this, both parties may have received inheritances from their respective parents.

The wealth that is shared by the couple was accumulated by two different individuals. Why should the surviving spouse have just one exclusion to utilize?

Ultimately, Congress decided to make a change. Provisions contained within the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 made the estate tax exclusion portable in 2011 and 2012.

A subsequent tax relief act was passed at the end of 2012 that is called the American Taxpayer Relief Act of 2012. This act made the portability of the estate tax exclusion permanent.

Election of Portability

Portability is available to you, but you must take action after the death of your spouse if you want to opt in. A representative of the estate must file Internal Revenue Service Form 706 within nine months of the passing of the decedent to elect portability.

However, if you need more time for some reason, a six-month extension can be granted.

Schedule a Free Consultation

If you are exposed to the estate tax, you should certainly explore all of the wealth preservation options that are available to you.

Our firm offers free consultations, and we would be glad to assist if you are concerned about the potential impact of the estate tax. To set up an appointment, send us a message through our contact page.