Share

Hampton Roads Estate Planning and Administration Law Blog

Thursday, August 2, 2018

What is Estate Tax Portability and How Does it Affect Me?

Estate tax portability means that the unused portion of the first-to-die spouse’s estate tax exemption passes to the surviving spouse.  The current estate tax exemption is $5.45 million. This means that a married couple’s total estate tax exemption is currently $10.9 million (in 2016).  For example, a husband dies with $2 million in separate assets.  He has $3.45 million remaining in his estate tax exemption, which passes to his wife, giving her a total of $8.9 million in estate tax exemption.  Without portability, the husband’s remaining exemption might have been forfeited if the couple had not implemented special tax planning techniques as part of their estate plans.

How Do You Claim the Portability?

This is where married couples and estate executors can get into trouble.  The estate tax portability rule is not automatic.  In order to claim the remainder of the first-to-die spouse’s estate tax exemption, the surviving spouse or the deceased spouse’s estate executor must file an estate tax return soon after the death, usually within nine months.

If this filing deadline is missed, then the couple will not get the benefit of estate tax portability.  Missing the estate tax filing deadline can result in hundreds of thousands of unnecessary and avoidable estate taxes. Alternatively, married couples can utilize a special trust, referred to as a “credit shelter trust” or “bypass trust” to prevent forfeiture of their individual exemptions.  This planning technique must be undertaken when both spouses are still alive.

The Consequences of Failing to File an Estate Tax Return

As a simple example, consider a husband and wife who have a total of $7.5 million in assets, $6 million in a business the husband owns and the remaining $1.5 million owned by the wife.  Upon the wife’s death, the estate’s executor files a timely estate tax return and the wife’s remaining $3.95 million in estate tax exemptions passes to the husband.  When the husband dies, his entire $6 million business passes to his heirs tax free, even though his personal estate tax exemption is only $5.45 million.  If portability is not claimed, then approximately $500,000 of the husband’s business will be taxed (the current rate is 40 percent).  The husband’s heirs would be required to pay approximately $200,000 in estate taxes which could have been avoided if the wife’s estate executor had filed an estate tax return within the time limit.

Even if both spouses together have assets under the current $5.45 million exemption, it is still a good idea to file an estate tax return after the death of the first spouse.  Filing the estate tax return and preserving the portability benefit protects the surviving spouse’s heirs in the event the surviving spouse receives a windfall during his or her lifetime that raises his or her assets above the $5.45 million exemption level.


Archived Posts

2018
2017
2016
December
November
October
September
August
July
June
May
April
March
February
January
2015
December
November
October
September
August
July
June
May
April
March
February
January
2014
December
November
October
September
August
July
June
May
April
March
February
January
2013


Workshops Request a Consultation Newsletters



© 2018 TrustBuilders Law Group | Disclaimer
295 McLaws Circle, Suite 2, Williamsburg, VA 23185
| Phone: 757-345-6644

Elder Law | Estate Planning | Asset Protection | Trusts & Advanced Planning | Business Succession Planning | Probate & Estate Administration | | Our Approach | Our Attorneys | Resources

Law Firm Website Design by
Amicus Creative


© TrustBuilders Law Group | Disclaimer
Williamsburg | Yorktown | Saluda | Virginia Beach