Portability and Shield Estate Tax 1000px
By: Glenn Schanel, CPA
on January 9, 2018

For the next few years, estate planning will be easier, thanks to the increased exemption amounts under the tax reform signed into law last December. Starting in 2018, the estate exclusion amount more than doubles, from $5.49 million for 2017 to $11.2 million.

By electing portability, a married couple can shield even more from estate tax. Portability has been around since 2011 and remains intact under the new law. Portability allows a surviving spouse to add the deceased spouse’s unused estate exclusion (DSUE) to their own estate tax exclusion when they ultimately pass away.

How portability works

Portability is easiest to understand with an example, so let’s look at Leon and Alice. Leon had an estate worth $5 million when he died in early 2017. He left everything to his wife Alice, who had $5 million of her own assets. Because of the marital deduction, which allows a deceased spouse to pass an unlimited amount of assets to their spouse tax-free, Leon had no estate tax liability. But in late 2017, Alice died, leaving behind an estate of $10 million.

Without portability, Alice has a taxable estate. Her estate will owe about $1.8 million in tax ($10 million minus $5.49 million = $4.51 million times 40% tax).

But if the executor of Leon’s estate elects portability, Alice’s executor can add the unused portion of Leon’s estate exclusion ($5.49 million) to Alice’s exclusion of $5.49 million.This results in an estate tax exclusion of $11.98 million for Alice’s estate, and no tax liability.

How to take advantage or portability

Portability must be elected on a timely filed estate tax return (Form 706) for the first spouse who dies. Even if the size of the estate is below the threshold for filing Form 706, filing Form 706 is the only way to make this election. It’s not automatic. Form 706 is due nine months after the date of death. An automatic six-month extension is available.

However, because the IRS was inundated with requests for leniency on late elections, a process for late elections was created with Revenue Procedure 2017-34. Using this process, the executor of an estate now has two years from the date of death to elect portability. To take advantage of the late election, the executor files Form 706 with portability elected and this statement at the top: “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).”

If a spouse remarries, they can only use the DSUE of their last deceased spouse. For example, George and Shiela marry after their previous spouses pass away. George has a DSUE of $2 million from his late wife’s estate, and Shiela has a DSUE of $1 million from her late husband. If Shiela dies first, George loses the $2 million from his previous wife. If Shiela’s executor elects portability, George will be able to add Shiela’s DSUE of $1 million to his own estate exclusion amount.

What this means under the new law

With the higher estate exclusion amounts, only those estates with values approaching $11 million will need to consider the need for electing portability, at least through 2025. By electing portability, a couple could shield $22.4 million from estate taxes.

As the current law stands, beginning in 2026, the exclusion amount will drop back to the $5 million range, adjusted for inflation. The trend in estate tax law has been for increasingly generous exclusion amounts, so it’s hard to imagine that Congress will allow the exclusion amount to drop so precipitously. However, it could happen, so it may be wise to elect portability for estates well under the $11 million threshold as a safeguard.

Let’s look at another example. Leona’s estate was $7 million and she passes away in 2018. Leona has no taxable estate and she leaves all her assets to her husband Alfred.
Her husband Alfred has an additional $7 million in assets, and when he passes away in 2026, his estate is worth $16 million. If the estate exclusion drops to $5 million, Alfred will owe tax on $11 million.

But if Leona’s executor elects portability by filing Form 706, Alfred will have a DSUE of $11.2 million from Leona’s estate plus the 2026 projected exclusion of $5 million. His estate will have no tax liability.

It’s never too early to begin thinking about estate planning, especially with all the changes in the new law. We can discuss your options for leaving a legacy to your heirs with the least amount of estate tax due. Call our office at 561-624-2118 and we can start planning for tomorrow.



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