Portability is the provision in Federal Estate tax law that allows a surviving spouse to use any unused estate and gift tax exemption after the deceased spouse’s death. In January 2013, the American Tax Relief Act of 2012 (ATRA) was signed into law to extend the opportunity for spouses to benefit from “portability” of a decedent’s unused estate tax exemption. Portability can be utilized to protect the surviving spouse from having to pay excessive gift or estate taxes upon their spouse’s death.

To apply for portability for an estate which does not exceed the exemption amount, a form 706 must be filed within two years from the date of death. The surviving spouse can use the remaining portion of the deceased spouse’s Estate Tax exemption. If the estate amount remains under the exemption amount, which is $11.7 million in 2021 ($23.4 million for married couples), then no tax will be owed. If a decedent’s estate was taxable (over the exemption threshold) there is strict nine-month deadline plus a six-month extension. The return is filed simply for reporting purposes.

So, why file a return if no taxes are due? The reason is simple: the law will change and when the Federal Estate Tax exemption amount is reduced in the future, the surviving spouse will have protected their additional exemption amounts for his or her heirs.

FOR EXAMPLE: Bob and Nicole are married and have a combined estate worth $20 million. Bob dies in 2021 leaving all his assets to Nicole. Because Bob left everything to Nicole, his estate suffers no estate tax because the law allows unlimited transfers between spouses free of any kind of estate or gift tax. Per se, Bob did not use any of his $11.7 million lifetime exemption at his death. Nicole could then “elect” to use Bob’s unused $11.7 million exemption for herself. At Nicole’s death, she will have her own $11.7 million lifetime exemption plus Bob’s unused $11.7 million exemption that she can use, bringing her total amount of exemption to $23.4 million that can pass estate tax free. Because Nicole can use Bob’s exemption, the couple’s entire estate would pass tax free to their children or whomever their beneficiaries may be.

Recently, there have been ideas floating around regarding proposals that would decrease the exemption amount from the current $11.7 million threshold, to $3.5 million per individual ($7 million per married couple). Regardless, if these ideas are not set into motion, the current exemption amount is scheduled to sunset in 2025 and decrease the exemption amount to $5.5 million ($11 million per married couple). Filing for portability sooner rather than later is a wise option for most couples with substantial assets, especially those whose spouse has recently passed. For more information on portability, call us to set up an appointment with one of our tax attorneys.

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