If you are married and making lifetime gifts or planning your estate, you should factor in portability when making planning decisions. Please note that the discussion below refers to spouses who are both U.S. citizens; laws differ for non-citizens.
Estate tax portability is a United States federal tax concept. Married couples have twice the individual estate and gift tax exemptions, and portability gives the surviving spouse the remainder of the deceased spouse’s exemption amounts. In 2018, the individual exemption amount for both gift and estate tax exemptions is $11.18 million, making the married couple exemption twice that at $22.36 million.
The exemptions permit you to have a total of $11.18 million in lifetime gifts to other people and the value of your estate combined, without paying additional taxes (besides gift taxes if your yearly gifts exceed a certain amount).
When one spouse in a married couple passes away, he or she may have some exemption amount remaining. For example, he or she could have made $5 million in lifetime gifts and have a $2 million estate. That leaves $4.18 million in exemption value. If the surviving spouse takes advantage of estate tax portability, he or she can add the $4.18 million in exemptions to his or her own remaining exemption amount. A surviving spouse who had not made any lifetime gifts would then have a total estate and gift tax exemption of $15.36 million.
To receive the benefits of estate tax portability, a surviving spouse or estate executor must make the appropriate election on the estate tax return for the estate of the deceased spouse. If this election is not made, the surviving spouse will not receive the benefits of his or her spouse’s remaining exemption amounts.
In other words, the spouse in the example above would have only his or her individual exemption amount of $11.18 million, not $15.36 million. Whether the surviving spouse needs to make or should make the election will vary based on his or her circumstances and the size of the deceased spouse’s lifetime gifts and estate.
Since many married couples choose to leave their estates to each other, portability decreases the likelihood that a surviving spouse who inherits a large estate from the deceased spouse will have an estate that exceeds the exemption.
For some couples, portability makes a big difference in their tax liability. For other couples, using alternative estate planning structures, such as trusts, may have more of an impact. People who are part of blended families, who have married more than once, who have other designated heirs besides their spouse, or who want to make a multi-generational estate plan should consult an estate planning attorney to determine how portability matters for them.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience and her certification as a California estate planning and probate specialist by the California State Bar Board of Legal Specialization will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.