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What is Portability and How Does It Impact Estate Planning?

Let's clarify what the word “estate” really means. It actually doesn’t have anything to do with the size of your home. "Estate" refers to an individual's assets, which includes their home(s), bank accounts, investment accounts, cars, etc.

According to The Times Herald's article“Federal estate tax and portability considerations,” federal estate tax impacts very few people today, as a person would have to have assets that total more than $11.4 million (or $22.8 for a couple) before they have to worry about the federal estate tax. But that doesn't mean that you shouldn't file an estate tax return. We discuss more about portability, what it is, and how it can affect your estate. 

What is Portability?

Portability is a provision in federal estate tax law that allows a surviving spouse to use any unused estate and gift tax exemption after the deceased spouse's death. Portability can be used to protect the surviving spouse from having to pay steep gift or estate taxes upon a spouse's death. 

Portability & Federal Estate Tax Exemptions

It is recommended that individuals and couples with substantial assets create an estate plan with the help of an attorney to help them minimize their federal tax liability. 

However, when one spouse dies, the surviving spouse is encouraged to file a Federal Estate Tax return for reasons of portability. This is because when a spouse passes away, they use a portion of the Federal Estate Tax exemption, but there’s usually a portion available for the surviving spouse.

If IRS Form 706 is filed in a timely manner, the surviving spouse can “port over” or protect the remaining amount of Federal Estate Tax exemption that the deceased spouse has not used. This return needs to be filed within nine months of the date of death, although the surviving spouse can obtain an extension.

No tax will be owed, since the return is filed merely for reporting purposes.

What Assets Must Be Reported?

The assets in the entire estate must be reported, including everything the person owned.

That may be:

  • Cash
  • Securities
  • Real estate
  • Insurance
  • Trusts
  • Annuities
  • Business interests
  • Other assets

It should be noted that this will likely include probate as well as non-probate property. Appraisals and significant documentation are not usually required on a return just for portability purposes.

If No Taxes Are Paid, Why Do I Need to File a Return?

Why does a return need to be filed to claim the unused exemption, if no taxes are going to be paid? For one thing, the law may change and if the Federal Estate Tax exemption amount is reduced in the future, the surviving spouse will have protected their additional exemption amounts for his or her heirs.

If the surviving spouse remarries and acquires significant assets, they will need proof of their exemption. The surviving spouse might own land or other property that increases dramatically in value. Or, the surviving spouse may inherit a large amount of assets.

Help from an Experienced Attorney

Completing an IRS Form 706 for portability is not a complex task, but it should be done at the same time the estate is being settled. It is recommended that you secure the help of an experienced estate planning attorney to help ensure any tax issues are dealt with properly.

In addition, when a spouse passes away, it is also a good time for the surviving spouse to update their estate plan with any new changes or developments.

We invite you to request a consultation with one of our experienced estate planning attorneys. Located in the Madison and Rockford areas, our attorneys can answer questions you have about portability.

Reference: The Times Herald (July 7, 2019) “Federal estate tax and portability considerations”
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