June 4, 2015

Estate Tax – Portability

Estate planning is often a complicated and time consuming process. However, it has also become an increasingly important one for many wealthy individuals, and its impact can be significant depending on a person’s financial and philanthropic goals.  One of the most important recent changes to the estate and gift law relate to the “Portability Election.” In essence, the Portability Election allows a deceased spouse to transfer any unused unified federal gift and estate tax exemption to his or her spouse, thereby increasing the amount of wealth transferred tax free upon the death of his/her survivor.

For 2015, the unified federal gift and estate tax exemption (the maximum amount individuals can gift in total either during their lifetime or at death without incurring gift or estate tax) is $5,430,000 per individual or $10,860,000 for a married couple. The exemption is adjusted annually for inflation. For 2015, the maximum portable exemption amount passing from the first deceased spouse to the surviving spouse is limited to the lesser of:

  • $5,430,000 or
  • $5,430,000 minus the amount left in the deceased spouse’s estate

Thus, the possible benefits from making the Portability Election could result in savings of up to $2 million dollars ($5.4M exemption * 40% estate tax rate).

For those who have estates within and under this range, it may seem as if the traditional approach to estate planning can be set aside. For some, this may be true, depending on life expectancy, retirement goals, and rate of spending. However, for many individuals, there are still various techniques that can be utilized to maximize tax-free transfer of wealth to their beneficiaries as well as an array of scenarios that should be considered which may affect estate plans already in place. For those who have estates significantly exceeding the portability amounts, certain strategies can be particularly advantageous with the right foresight and implementation.

In addition, decisions about whether or not to make the Portability Election are complicated by the types of assets that are held in both the deceased and surviving spouses’ estates as well as other factors such as whether the spouses live in a community property state such as California. The Portability Election is irrevocable and must be made on a timely filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return even if a Form 706 is not required to be filed for the predeceased spouse’s estate (IRS Notice 2011-82). If the Form 706 is not filed, the surviving spouse could lose the benefits of portability.

With the inherent temporary nature of tax law, annual inflationary adjustments to limitations, and the numerous possibilities surrounding one’s own family life, the topic still requires not only careful consideration, but also periodic review.  Additionally, President Obama has proposed tax increases for estates and gifts while Republicans have recently proposed a complete repeal of estate tax and a reduction in gift taxes. The fundamental difference of opinion between the two prominent political parties with regards to this concept should be considered when deciding how much to rely on portability compared to other transfer strategies. Although described as “permanent”, it should not be viewed as such with politics at play and, therefore, needs to be revisited in the event of any changes.

We welcome the opportunity to speak with you about  specific techniques and strategies that might best fit your family’s particular circumstances. Please feel free to contact us to discuss your specific situation.