A Brief Overview of Portability

The estate tax is an infamous, though oftentimes misunderstood, aspect of estate planning and probate. Recent years have seen significant changes made to estate tax laws, including the permanent addition of portability in 2013.

Below we have provided a brief overview of the key things you need to understand about how the estate tax works with regard to portability. If you have more questions which we have not answered below, please contact the Law Offices of John Mangan today!

What is the Estate Tax?

The estate tax is, as the name implies, a tax which is levied on the gross value of an individual’s estate after they die. Technically, it is a tax on the right to transfer your assets to others at death. Though there are some exceptions, the IRS will consider the fair market value of every asset you own at the time of your death in order to determine the gross value of your estate. As with a standard income tax return, there are deductions which may be claimed in order to lower the value of the estate.

After all deductions are considered, you are left with the net value of the estate. The amount of that net value which you intend to pass on to your beneficiaries will then be taxed at a rate of 40% before they receive it.

What is the Estate Tax Exemption?

Not everyone will be required to file an estate tax return. The IRS allows for an exemption from the estate tax requirement for estates with a total gross value (including past gifts)—as of 2016—of $5,450,000. Only a very small percentage of the population has this amount of wealth, and those who own less than $5.45 million in assets will not be required to pay any estate taxes (assuming the individual’s estate tax exemption has not been depleted through lifetime gifting). Even if your estate is valued at over $5.45 million, each individual may exempt that amount from the estate tax. For example, say someone wanted to leave $6 million in assets to his or her heirs. Only $550,000 of that would be subject to the 40% estate tax.

So what is portability?

Current laws provide for an extremely beneficial tool for married couples with estates which are subject to the estate tax known as portability. The advent of portability was a recent development, and only became permanently available in 2013. In layman’s terms, portability allows spouses to share their estate tax exemptions with one another. This is an incredibly practical tool.

When one spouse dies, it is likely that he or she may use less than the total exemption amount that he or she is entitled to use (particularly in consideration of the fact that bequests and distributions left at death to a spouse may qualify for an unlimited marital deduction). Portability means that the surviving spouse will be allowed to add the remainder of the decedent spouse’s exemption to his or her own exemption. Thus, if a husband predeceases his wife and only uses $2 million of his exemption, his wife could add $3.45 million to her own $5.45 million exemption. Then, when she passes, her estate can exempt up to $8.9 million from the estate tax.

Thanks to portability—as well as numerous other estate planning tools and vehicles—there are many creative ways to maximize the amount of your assets which you are able to leave to your loved ones. It is never too early to start making plans, so contact the Law Offices of John Mangan today to discuss your estate planning goals and learn how we can help.