“Portability: Estate Planning Hack” by Attorney Beth Burgee (Audio)
One of the major concerns many people have when completing their estate plan is estate taxes and portability is one of many tools that can combat this concern.
So, what is portability exactly? Portability is an election that can be made under both federal and state tax laws. A portability election allows a surviving spouse to utilize the unused estate tax exemption of their deceased spouse and add it to whatever the exemption amount is in the year that the surviving spouse dies.
Who can elect portability?
The first thing to note is that the option to elect portability is only available for married couples and only when the first spouse dies. To elect portability, you must file “Form 706 – Estate Tax Return” with the IRS and a Maryland Estate Tax Return with the Comptroller of Maryland within nine months of your spouse’s death.
What is the Estate Tax Exemption?
Federal law codifies a Federal Estate Tax Exemption. For the year 2024, this exemption amount is $13.61 million. Maryland also has a State Estate Tax Exemption of $5 million for 2024. This exemption means that if you die in 2024, you will not owe estate tax at the federal level if your gross assets total less than $13.61 million or at the state level if your gross assets total less than $5 million.
What do you mean by “Unused” Exemption?
When someone dies, their exemption is “used” based on how much their gross estate totals. For example, say a decedent’s gross estate is $3 million in 2024 and it all goes to their sister. They have used $3 million from their exemption, so their unused portion federally is $10.61 million. However, if a decedent leaves all of their assets to their spouse, then they get what is called an Unlimited Marital Deduction. This just means that none of the assets that are left to a spouse count against the decedent’s estate tax exemption. So, taking our earlier example, if all $3 million dollars of the decedent’s estate is left to his spouse, then that $3 million dollars qualifies for the Unlimited Marital Deduction and the decedent still has an unused federal estate tax exemption amount of $13.61 million in 2024.
Why should I elect portability?
Now that we have gone over portability, the question turns to why we elect it. Portability is a great way to guard against uncertainty in the future. You will never know for sure what the estate tax exemption will be in the year that you pass. So, we might have a relatively high federal estate tax exemption in 2024, but unless you plan on dying now, that won’t help you. The only figure that matters is the one for the year you pass. Unless you elect portability. Then, you get the exemption amount in the year you pass plus the unused exemption amount from your deceased spouse. So, even with the shifting changes in policy, you can always bank on having at least an exemption amount that is equal to no less than your deceased spouse’s unused exemption amount. But remember, you have to elect portability on your deceased spouse’s estate tax return to get this benefit.
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