What is Portability in Estate Planning? Portability for Estate Tax Exemption and Gift Tax

A couple spends their entire lives building their wealth, dreaming of passing it on to their loved ones. But without careful planning, a significant portion of that wealth could be lost to taxes. Imagine having a tool that ensures no part of your hard-earned exemption goes unused, allowing your legacy to thrive. This is where portability in estate planning comes in—a potential game changer for married couples looking to maximize their estate and gift tax benefits. In this article, we’ll explain what portability is, how it works, and why it could be the key to securing your family’s financial future.

Think of portability as a powerful estate planning shortcut that helps married couples save on estate taxes. When one spouse passes away without using their full estate tax exemption, the surviving spouse can inherit the unused portion—effectively doubling their exemption. Simply put, it’s a way to maximize tax savings and protect more of your assets for your loved ones.

Let’s break it down:

Let’s say a couple has a $20 million estate. If one spouse passes away and still has $5 million of their exemption unused, the surviving spouse can “port” that $5 million to their own exemption. With today’s exemption set at $13.99 million per person, the surviving spouse would now have a total exemption of $18.61 million. That’s a huge tax-saving advantage!

Limitations and Conditions of Portability

Understanding the limitations and conditions tied to estate planning tools is crucial. These factors can significantly impact the effectiveness of your strategy, which is why it’s important to evaluate them carefully before implementing any plan. This section will provide insight into these critical elements to ensure you can make informed decisions.

If you’re legally married, you’re in luck, as portability is exclusively available to married couples. But if you’re in a long-term relationship without tying the knot, even if you’ve been together for decades, you don’t get this benefit. It’s one of those areas where the law just doesn’t account for modern relationships or non-traditional families.

ii.  It Won’t Help with State Estate Taxes

Here’s an important catch: Portability is a federal rule; it doesn’t automatically apply to state estate or inheritance taxes. Some states have lower exemption thresholds than the federal limit, meaning even if you’re covered at the federal level, you could still owe state estate taxes. If you live in a state with its own estate tax, this is definitely something to watch out for!

iii. The Deceased Spouse’s Unused Exemption Doesn’t Adjust for Inflation

Bad news: The deceased spouse’s unused estate tax exemption is locked in at the time of their death as it doesn’t grow with inflation. Meanwhile, the surviving spouse’s own exemption does increase over time. This means that if estate tax exemptions rise over the years, the ported amount may not be worth as much in the future.

iv. It Doesn’t Carry Over If You Remarry

Thinking of getting remarried? Here’s something to consider: You can only claim portability from your most recently deceased spouse. So, if you inherit an unused estate tax exemption from your first spouse but later remarry and your second spouse also passes away, you lose the first spouse’s exemption. This can get complicated quickly, especially if there are multiple marriages involved.

v. It Doesn’t Protect Against Asset Growth

Portability helps with transferring unused exemptions, but it doesn’t shield assets from appreciation. Let’s say your spouse leaves you a portfolio worth $5 million. If that portfolio grows to $10 million by the time you pass away, the extra $5 million in growth is still taxable portability doesn’t protect against that. A solid estate plan (such as trusts) might be needed to handle asset growth efficiently.

vi. Only Available to U.S. Citizens (With One Exception)

Portability is only for U.S. citizens or qualifying resident aliens. If you’re married to a non-citizen spouse, portability won’t apply unless you use a special type of trust called a Qualified Domestic Trust (QDOT). If your spouse is a non-citizen, it’s crucial to have the right legal structures in place to avoid unexpected tax burdens.

How to Elect Portability: Key Steps for Executors

If you’re the executor of an estate, electing portability is one of those tasks that can make a huge financial difference for the surviving spouse. Done right, it allows them to carry over any unused estate tax exemption, potentially saving millions in taxes. Sounds important, right? That’s because it is! But don’t worry! I’ve got you covered. Here’s a clear, step-by-step breakdown of how to make sure portability is properly elected.

1. First Things First: Is Portability Even an Option?
   Before diving into paperwork, make sure the deceased spouse was a U.S. citizen or resident at the time of death. Portability only applies in those cases. Also, check whether their estate falls below the federal estate tax exemption limit, which, as of 2021, is $17.29 million. If it’s under that amount, you’re good to go.
2. File Form 706 (Yes, Even If No Tax Is Owed)
   To elect portability, you must file IRS Form 706 (United States Estate and Generation-Skipping Transfer Tax Return). Even if the estate isn’t taxable because it’s under the exemption limit, this form still needs to be filed. Think of it like this: No Form 706 = No Portability.
3. Don’t Miss the Deadline (It’s Sooner Than You Think)
   Timing is everything. Form 706 is due within 9 months after the date of death. If you need more time, you can request a 6-month extension by filing Form 4768. Important: Miss the deadline, and you might lose the portability benefit unless the IRS grants an extension (more on that later).
4. Get the Estate Valuation Right (Accuracy Matters)
   Even if the estate isn’t subject to federal estate taxes, you still need to provide a full valuation of the deceased spouse’s assets on Form 706. This means listing everything, such as cash, real estate, retirement accounts, investments, and personal property, along with their fair market value at the time of death.
   Why does this matter? The IRS needs a clear picture of the estate before approving the portability election.
5. Clearly Elect Portability on Form 706
   It’s not automatic! On Form 706, you’ll need to explicitly state that the estate is electing portability. Make sure the section related to the Deceased Spousal Unused Exclusion (DSUE) amount is properly completed. This is what allows the surviving spouse to use the exemption in the future.
6. Bring in the Pros (Seriously, It’s Worth It)
   Estate tax rules can be complicated, and one small mistake could mean losing out on major tax savings. This is why it’s a smart move to work with an estate planning attorney or tax advisor. They can help to ensure Form 706 is filed correctly, accurately calculate exemptions and handle IRS compliance issues

Pro tip: If you’re feeling unsure, don’t guess, get professional help!

Portability and Lifetime Gift Tax Exemption

Portability isn’t just about estate taxes it also plays a big role in lifetime gifting, and if used strategically, it can help you pass on more wealth while minimizing taxes.

Here’s the deal: The lifetime gift tax exemption lets you give away a significant amount of assets during your lifetime without triggering gift taxes.

Making Tax-Free Gifts: The Power of Annual Gifting

You can pay up to $16,000 per person per year without touching your lifetime exemption or paying federal gift taxes. And the best part? There’s no cap on how many people you can gift to!

Married couples can take this even further by splitting gifts, essentially doubling the limit. Let’s say you and your spouse have two kids:

Once you give these gifts, they’re completely removed from your taxable estate, helping you reduce potential estate taxes down the line.

If your estate is likely to exceed the taxable threshold, starting a long-term gifting strategy now can be a game-changer. By gradually transferring wealth to your loved ones, you can minimize estate taxes, maximize exemptions, and ensure more of your assets go to your heirs, not the IRS.

Bottom line? Portability + strategic gifting = serious tax savings. And who doesn’t want that?

Portability is a powerful tool in estate planning that allows a surviving spouse to utilize the unused estate tax exemption of their deceased partner. When implemented properly, it can significantly minimize future tax liabilities and ensure that more wealth is preserved for heirs. However, navigating the process involves complexities, including strict deadlines, accurate asset valuation, and meticulous filing with the IRS. To make the most of this strategy, it’s essential to work with an experienced estate planning attorney who can guide you through the intricacies of portability and ensure compliance with all requirements.