Estate planning for married couples often involves strategies to maximize the use of both spouses’ estate tax exemptions. A key component of this is understanding the concept of “portability,” specifically the spousal portability election. This allows a surviving spouse to “port” or transfer any unused portion of their deceased spouse’s estate tax exemption to their own estate, effectively doubling their exemption amount. Without this election, the deceased spouse’s unused exemption would be lost, potentially leading to unnecessary estate taxes. The Tax Cuts and Jobs Act of 2017 made portability permanent, simplifying estate planning for many couples. According to the IRS, approximately 98% of estates do not owe estate taxes due to the high exemption amounts and portability, but making the election is still crucial for proactive planning.
What exactly is the estate tax exemption, and why is it important?
The estate tax exemption is the amount of assets a person can leave to their heirs without owing federal estate tax. For 2024, the federal estate tax exemption is $13.61 million per individual. This means a single person can leave up to $13.61 million to their heirs tax-free. For married couples, this theoretically doubles to $27.22 million, but only if the appropriate steps are taken to utilize spousal portability. Failure to plan can result in a significant tax burden on the estate, reducing the amount of assets available to the beneficiaries. It’s important to remember that state estate taxes may also apply, with lower exemption amounts than the federal level.
How does the portability election work in practice?
The portability election isn’t automatic; it requires filing Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, with the IRS within nine months of the deceased spouse’s date of death, even if the estate itself doesn’t owe any estate tax. This is often a point of confusion for many people, as they assume the exemption is automatically transferred. The filing is essentially a notification to the IRS that the deceased spouse’s unused exemption should be added to the surviving spouse’s exemption. The surviving spouse then uses this combined exemption amount when they pass away. The IRS provides specific instructions and guidance on completing Form 706, and it’s highly recommended to work with an estate planning attorney to ensure accuracy.
What happens if the election isn’t filed?
If the portability election isn’t filed within the nine-month window, the deceased spouse’s unused exemption is lost. This can have a significant financial impact on the surviving spouse’s estate, potentially leading to unnecessary estate taxes. I recall a case involving a retired teacher named Eleanor. Her husband, George, passed away unexpectedly, and her family, believing her estate was well under the exemption limit, did not file Form 706. Years later, due to a surge in property values and investment growth, her estate exceeded the exemption amount when she passed. The family was faced with a substantial estate tax bill they hadn’t anticipated, and their financial situation was significantly impacted. This situation highlighted the importance of proactive estate planning and the portability election, even when the estate initially appears to be below the exemption limit.
Are there any situations where portability might not be beneficial?
While portability is generally advantageous, there are a few scenarios where it might not be the best strategy. For example, if one spouse has significant gift tax liabilities, utilizing portability could increase the risk of gift tax implications. Additionally, if the surviving spouse is not a U.S. citizen, portability may not be available. It’s crucial to consider the specific circumstances of each couple and consult with an estate planning attorney to determine the most appropriate strategy. There can also be situations where a qualified personal residence trust or other advanced planning techniques are more beneficial than relying solely on portability.
What documents are needed to make a portability election?
The primary document required is Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. This form requires detailed information about the deceased spouse’s assets, debts, and any gifts made during their lifetime. Additionally, a copy of the death certificate is required. It’s important to gather all relevant financial records, including bank statements, investment accounts, and property deeds, to ensure accurate completion of the form. Working with an experienced estate planning attorney can streamline this process and ensure all necessary documentation is properly prepared and submitted.
Let’s say a couple did everything right – what does success look like?
I remember working with a couple, the Harrisons, who were meticulous about their estate planning. They had a comprehensive estate plan drafted, including wills, trusts, and power of attorney documents. They diligently filed Form 706 after the husband’s passing, ensuring the portability election was properly made. Years later, when the wife passed away, her estate benefited significantly from the combined exemption amounts. There were no unexpected tax liabilities, and the inheritance was distributed to their children according to their wishes. It was a testament to their foresight and proactive estate planning, allowing them to provide financial security for their family and avoid unnecessary stress during a difficult time. This highlighted the power of a well-executed estate plan and the importance of taking the necessary steps to maximize the benefits of portability.
What are the potential consequences of failing to plan for portability?
Failing to plan for portability can result in significant estate tax liabilities, reducing the amount of assets available to your heirs. According to recent data, estates exceeding the exemption amount can face estate tax rates of up to 40%. This can have a devastating impact on the financial future of your family. Proactive estate planning, including making the portability election, can help minimize these tax burdens and ensure your assets are distributed according to your wishes. It’s essential to consult with an estate planning attorney to create a customized plan that meets your specific needs and goals. Don’t delay—start planning today to protect your family’s financial future.
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 does it mean to fund a trust?” or “What happens if the executor dies during probate?” and even “Should I name a bank or institution as trustee?” Or any other related questions that you may have about Trusts or my trust law practice.