The concept of estate tax exemption portability is a crucial aspect of modern estate planning, allowing married couples to effectively double their federal estate tax exemption. Prior to 2011, the estate tax laws were structured differently, often requiring complex strategies to maximize the exemption available to both spouses. Today, the portability rule, codified under Section 2010 of the Internal Revenue Code, simplifies this process considerably. As of 2023, the federal estate tax exemption is $12.92 million per individual, meaning a married couple can potentially shield up to $25.84 million from estate taxes. However, simply being married doesn’t automatically guarantee the full benefit; proactive steps must be taken to elect portability on the deceased spouse’s estate tax return.
What happens if I don’t elect portability?
Failing to elect portability can lead to a significant tax burden. Without the election, the surviving spouse is limited to their *own* individual exemption amount, potentially subjecting the estate to estate taxes that could have been avoided. Approximately 99.8% of estates do not owe estate taxes due to the high exemption amount and portability; however, even for estates close to the exemption threshold, the impact can be substantial. The election, made on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, must be filed on time, even if the estate doesn’t owe any estate taxes. This can be a common oversight, as many assume that the exemption automatically transfers, and it’s essential to verify that the return is accurately completed and filed with the IRS.
Is portability right for every couple?
While portability offers significant benefits, it isn’t universally the best strategy. Consider a situation where one spouse has significantly more assets than the other. In this case, it may be more beneficial to utilize strategies like gifting or establishing trusts to reduce the size of the estate subject to tax, rather than relying solely on portability. Furthermore, it’s essential to consider state estate tax laws, as some states do not conform to the federal portability rules. These individuals need to consider if they would benefit from an A-B trust, a more traditional method of maximizing estate tax benefits. A qualified estate planning attorney, like Steve Bliss, can help you navigate these complexities and determine the most appropriate strategy for your specific circumstances.
How does gifting impact portability?
Gifting during life can be a powerful tool for estate tax planning. Gifts made during a spouse’s lifetime don’t reduce the available estate tax exemption, as they are covered by the annual gift tax exclusion ($17,000 per recipient in 2023). However, gifts *exceeding* the annual exclusion will deplete the lifetime gift and estate tax exemption, effectively reducing the amount available for portability. It’s a delicate balance; strategic gifting can reduce the overall estate size, but excessive gifting could inadvertently diminish the portability benefit. For instance, a couple makes substantial gifts to their children each year, exceeding the annual exclusion. While reducing their eventual estate, they haven’t accounted for the potential impact on the surviving spouse’s portability election. This is where meticulous record-keeping and professional guidance become paramount.
What happens if my spouse dies without an estate tax return?
A frequent issue arises when a spouse passes away with assets below the federal estate tax exemption threshold. Many believe a tax return isn’t necessary, which is true for tax liability purposes, but crucial for portability. The IRS requires a Form 706 to be filed to *elect* portability, even if no tax is due. Without this filing, the surviving spouse loses the opportunity to utilize the deceased spouse’s unused exemption. I remember assisting a client, Eleanor, whose husband passed away unexpectedly. They had a comfortable estate, well below the exemption threshold. She assumed no return was needed, and unfortunately, missed the portability filing deadline. By the time she realized the mistake, the deadline had passed and she’d lost significant tax benefits.
Can I reverse a portability election?
Unfortunately, once a portability election is made on a Form 706, it is generally irrevocable. This highlights the importance of carefully considering your estate planning options and making informed decisions. While the IRS may grant relief in limited circumstances, such as due to reasonable cause or hardship, it’s best to avoid the need for such requests. As a proactive measure, it’s wise to revisit your estate plan periodically to ensure it continues to align with your goals and circumstances. For example, a couple initially elects portability, but their financial situation drastically changes due to an unexpected inheritance. They wish they had the flexibility to undo the election, but are bound by the initial filing.
What if my spouse was not a U.S. citizen?
The rules surrounding portability are significantly different when one spouse is not a U.S. citizen. A non-citizen spouse is not eligible for the marital deduction, meaning assets passing to them may be subject to estate taxes. Furthermore, portability is generally not available in this situation. Specialized planning techniques, such as utilizing a Qualified Domestic Relations Trust (QDRT), are necessary to defer estate taxes and protect the surviving spouse. I once worked with a couple where the husband was a U.S. citizen and the wife a resident alien. They failed to establish a QDRT, resulting in substantial estate taxes upon his death. Properly structuring the estate with the appropriate trust would have mitigated this outcome.
What documentation is needed to claim portability?
To successfully claim portability, you must file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, with the IRS. The form requires detailed information about the deceased spouse’s assets, debts, and any prior gifts made. It’s crucial to maintain accurate records of all relevant financial information, including bank statements, brokerage accounts, and real estate deeds. Additionally, a copy of the death certificate must be included with the return. Properly prepared returns with all documentation are essential for a smooth process. It’s important to keep copies of all filed returns and supporting documentation for your records, as the IRS may request them in the future.
Estate planning isn’t a one-size-fits-all process, and the portability election is just one piece of the puzzle. Working with an experienced estate planning attorney, like Steve Bliss, can provide you with the guidance and support needed to navigate these complexities and ensure your estate plan reflects your unique goals and circumstances. Ultimately, taking proactive steps to address portability can provide peace of mind, knowing that your assets will be protected and your loved ones will be cared for.
About Steven F. Bliss Esq. at San Diego Probate Law:
Secure Your Family’s Future with San Diego’s Trusted Trust Attorney. Minimize estate taxes with stress-free Probate. We craft wills, trusts, & customized plans to ensure your wishes are met and loved ones protected.
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Feel free to ask Attorney Steve Bliss about: “What is an AB trust?” or “How do I account for and report to the court as executor?” and even “What are the consequences of dying intestate in California?” Or any other related questions that you may have about Probate or my trust law practice.