Estate Taxes, Portability, and Planning for All Married Couples

Published on Friday, January 18, 2013

One of the many provisions made permanent by the American Taxpayer Relief Act on January 1, 2013 was a $5 million exclusion (adjusted annually for inflation) for estates of decedents dying after December 31, 2012. This is great news as otherwise it would have reverted back to a $1 million exclusion. Along with the higher exemption, another permanent provision is “portability” between spouses. Portability refers to the ability to allow the surviving spouse to apply the unused portion of the deceased spouse’s $5 million exclusion in addition to the applicable $5 million exclusion available to the surviving spouse . Using 2013 inflation adjusted amounts; this results in the ability for a married couple to pass up to $10.5 million to their heirs free of estate tax. However, the decedent’s estate (the executor) must make a timely election, generally within 9 months of the date of death, to utilize this provision.

Portability will be an important planning tool and at the same time, allow some relief for those who did not plan. If a couple has unequal wealth such as separate property, family wealth or wealth from a former marriage, the ability to combine the applicable exclusions can be very beneficial. Or if the surviving spouse’s estate could increase significantly due to appreciating assets or possibly a young widow or widower, the portability election should be made to be utilized “further down the road”. But remember the key words above; “make a timely election”. This means some action must be taken even if no estate tax return is to be filed!

As a result, is estate planning still necessary for the majority of taxpayers with estates less than $5 million? Absolutely! There are still planning opportunities beyond the effect of estate taxes. Combined marriages with different beneficiaries, asset protection needs and other issues all need to be considered. Portability also has some limitations, including no inflation adjustments after date of death for the decedent’s exclusion amount and if the surviving spouse remarries, only the unused exclusion of the last spouse to die is available.

Estate planning is not only for the ultra wealthy. The portability election can end up being very beneficial for those with even small estates. Moderate wealth taxpayers should consider the benefits of both portability and other estate planning tools utilizing trusts, etc. Taxpayers of all income levels should at least be aware of these provisions. If you have questions or would like information as to how your situation can benefit with planning, please contact us. We would be happy to help you.

Arla A. Kester, CPA