The Definition of Portability
Portability is only available to married couples. The amount of the estate tax exemption that was not used for the deceased spouse’s estate can be transferred to the surviving spouse if the first spouse dies, and the value of their estate doesn’t use up all of the exemption. The surviving spouse can use the deceased spouse’s unused estate tax exemption plus their own exemption when the surviving spouse later dies.
The Federal Estate Tax Exemption
The federal estate tax exemption is indexed for inflation, so it increases periodically, usually yearly. It’s $11.58 million for deaths occurring in 2020, up from $11.4 million in 2019. It’s basically $11 million plus inflation adjustments.
The History of Portability
The TRUIRJCA introduced the concept of “portability” of the federal estate tax exemption between married couples for the 2011 and 2012 tax years. Then President Obama signed the American Taxpayer Relief Act (ATRA) into law on January 2, 2013, and ATRA made this portability feature of the estate tax permanent as of 2013.
Examples of Portability
The option of portability can make a significant difference when it comes to taxation of an estate.
The Estate Tax Without Portability
Assume Bob and Sue are married and all their assets are jointly titled. Their net worth is $18 million. Bob dies first in 2020 and the federal estate tax exemption is $11.58. Portability of the estate tax exemption between spouses is not in effect. His estate won’t need to use any of his $11.58 estate tax exemption when Bob dies because all the assets are jointly titled. The unlimited marital deduction allows Bob’s share of the joint assets to be automatically transferred to Sue by right of survivorship without incurring any federal estate taxes. The federal estate tax exemption is still $11.58 million when Sue dies. The estate tax rate is 40%, and Sue’s estate is still worth $18 million. Bob’s $11.58 million estate tax exemption went unused and Sue couldn’t claim it without portability, so Sue can only pass on $11.58 million to her heirs free from federal estate taxes when she dies. Sue’s estate will owe about $1,064,000 in estate taxes after her death:
$18,000,000 estate less the $11.58 million exemption = $6.42 million taxable estate$6.42 million taxable estate x 40% estate tax rate = $2.568 million in taxes due
The Estate Tax With Portability
Let’s assume the same scenario: Bob and Sue are married and have all of their assets jointly titled. Their net worth is $18 million. Bob dies first and the federal estate tax exemption is $11.58 million on the date of Bob’s death. Portability of the estate tax exemption between spouses is in effect, so when Sue dies:
$18 million estate less $23.16 million in two estate tax exemptions = $0 taxable estate
Bob’s estate won’t have to use any of his estate tax exemption because all their assets are jointly titled and they pass directly to Sue by right of survivorship. Assume that the federal estate tax exemption is still $11.58 million at the time of Sue’s later death. The estate tax rate is still 40%, and Sue’s estate is still worth $18 million. Using the concept of portability between spouses, Bob’s unused $11.58 million estate tax exemption would be added to Sue’s $11.58 million exemption, which gives Sue a $23.16 million exemption when the two are added together. Portability of the estate tax exemption will save Bob and Sue’s heirs about $2.568 million in estate taxes.
