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Estate Planning Discussion: What Is Portability and How Can It Affect You?

CPAs & Advisors

Kyle Richardson
Kyle Richardson CPA Manager CPAs & Advisors

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According to the Tax Policy Center, the federal estate tax impacts very few people. As the law currently stands, the lifetime exemption from federal gift or estate taxes for 2021 is $11.7 million per individual ($23.4 million for a married couple). For 2022, the amount will increase to $12.06 million per individual ($24.12 million for a married couple). What does this mean? Your estate is not taxable until the value exceeds these thresholds. However, that doesn’t mean you shouldn’t file an estate tax return.

What is portability, and how may it affect your estate?

Portability is a provision in federal estate tax law that allows a surviving spouse to use any of the unused estate and gift tax exemption after the deceased spouse’s death. This is called the deceased spousal unused exclusion (DSUE). In general, electing portability protects the surviving spouse from having to pay hefty estate tax bills should the surviving spouse’s estate exceed exemption thresholds. It is important to note that as the law currently stands, the current higher lifetime exemption amounts are slated to “sunset,” meaning it will go back to around $5 million effective January 1, 2026.

An example of the benefits of portability

Consider this example: John and Jill are a married couple. John dies in 2022 with an estate worth $2.06 million. This means that John has a $10 million unused lifetime exemption ($12.06 million – $2.06 million). If Jill elects portability, in 2022, she now has a lifetime exemption individually worth $22.06 million ($12.06 million + $10 million). Let’s say Jill makes it to the “sunset” date mentioned above; Jill still has a lifetime exemption amount of $15 million ($10 million carried over from John’s estate + $5 million of her own exemption). As you can see, the DSUE is preserved regardless of the current exemption (as the law currently stands). If Jill does not elect portability, she loses the unused amount of John’s exemption, and her estate becomes taxable at her lower threshold.

How can you make the portability election?

Make the election on Form 706, the same form you would use to file an estate tax return. To make the election, the estate tax return must be filed timely, that is, within nine months after the date of the decedent’s death. You are also allowed a six-month extension, so that is a maximum 15-month window. However, suppose there was no filing requirement for the decedent’s estate, and you were not aware of the portability election. In that case, you are still eligible to make the portability election under Rev. Proc 2017-34, which allows relief to elect portability up to the second anniversary of the decedent’s death.

Please contact our Yeo & Yeo professionals to discuss how portability may apply to your situation. Our professionals can help you navigate the election, especially in a tax environment with volatile tax law changes.

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