Preserving Your Estate: What Is Portability In Estate Planning

You can spend years building up your net worth, only for everything to dwindle after you pass. This is why it’s natural to want to discover methods of leaving your assets to your loved ones without worrying about taxes and administrative costs.

This is why you should consider portability.

But what is portability in estate planning and how can it help you preserve your assets?

What Is Portability In Estate Planning?

Portability is relatively easy to understand. It’s a simple tax provision that provides the surviving spouse with the ability to use any unused tax exemptions of their deceased spouse. Some refer to this exemption as a Deceased Spousal Unused Exclusion and it was introduced to help families deal with excessive estate taxes. 

The estate tax exemption is the amount that the IRS allows an estate to pass to heirs without paying taxes, which is currently $11.7 million per person. 

So, if one of the spouses dies without using the full exemption, the surviving spouse can transfer the remaining amount to themselves. 

It’s important to stress this doesn’t happen automatically and requires the personal representative of the deceased individual’s estate to elect it on their estate tax return. To use portability, you need to fill out the IRS form 706, which requires a full liability listing and a comprehensive asset inventory.

Why Should You Use Portability?

You now have a better idea about what is portability in estate planning, and we’re willing to bet you’re open to leveraging it yourself to minimize your tax burden.

Along with the nifty ability of this legal instrument to increase a surviving spouse's overall tax exemption significantly over the limit, it also provides you more ability when it comes to asset protection. 

Since you won’t have to use a trust, your family can access your estate when they need it most while maintaining the ability to retain unused tax exemptions. 

Potential Drawbacks Of Portability

Yes, portability is a valuable tool in your estate planning arsenal, but there are some potential drawbacks you should consider. 

Sadly, portability is only available for estate taxes but not generation-skipping taxes. This means you can’t use portability to shield monetary and asset transfers to your grandchildren from a significant tax burden. 

Moreover, portability isn’t adjusted for inflation. So, regardless of your best efforts, the benefits of using this legal tool may actually get erased by inflation. 

Last but not least, portability is only available for the most recent spouse, which might be a significant drawback if you had multiple marriages. 

Naturally, since the entire question of portability is complex, seek professional help if you have any concerns. An estate planning attorney can provide valuable legal advice and guidance and help you understand whether portability can work to your advantage in your specific circumstances.

How Portability Interacts With The Gift Tax

Gift tax and portability are inseparable. 

This is a federal tax that applies to all valuable transfers between two individuals. However, there is an annual gift tax exclusion which spares some assets from the tax if they fall below the annual gift tax exclusion ($17k per recipient). 

It’s typically the giver that is required to pay this tax if they shoot past the annual limit. 

But what does that have to do with portability?

Simple - portability not only applies to your estate taxes but also to your gift taxes. This means that your surviving spouse can potentially leverage any unused taxes to pay for the cost of gifts provided during their lifetime that exceeds the annual gift tax exclusion.

Here’s a quick example:

Let’s say one spouse passed away without using their full estate tax exemption allowing the remaining amount to be added toward their spouse’s exception. The surviving spouse can then make larger transfers while they’re alive 

For instance, if the spouse that passed away used just $5 million of their tax exemption, the surviving spouse is free to add the remaining amount to their own exemption. 

Since the remaining amount of estate taxes that can be transferred is $6.7m, the surviving spouse can provide tax-free gifts up to an amount of $18.4m during their lifetime. 

Similar to an estate tax portability, if you want to apply the amount to your gift tax, you must file an estate tax return immediately after your spouse’s death. 

All things considered, once you learn how portability interacts with the federal gift tax you can make it a powerful addition to your estate plan. By making as many tax-free gifts, a surviving spouse can drastically reduce their taxable estate. Naturally, this preserves the wealth for heirs by also reducing the estate’s tax liability. 

While it may not seem like much, you can spread out the frequency of these gifts over time among multiple beneficiaries. This means that you can practically reduce the overall estate each year simply by making gifts. 

Gift tax (and especially how it interacts with portability) can be complex. To maximize your estate and ensure you stay under the gift tax limit, hire an estate planning attorney or a tax professional to assist you in navigating the treacherous waters of estate planning. You may see it as a necessary expense, but a well-crafted estate plan can help you secure your assets and protect your loved ones’ financial future. 

Eliminate Your Estate’s Tax Burden

The main goal behind estate planning is protecting your wealth and preserving it for future generations. Even though you’re fully aware of what is portability in estate planning, keep in mind that there are plenty of other legal mechanisms at your disposal that can help you reduce taxes even further. 

This may seem overwhelming, especially considering making plans about such a distant future is an emotional subject for many families. This is why you should reach out to an experienced attorney who understands both the legal and the human side of things.

If you want to work with the best, contact the Law Offices of Mary E. King - professionals with over twenty years of experience in estate planning. 

Our name and the track record speak for themselves. We helped many families preserve their estates and leverage all the legal means available to improve their children’s financial standing, and we can do the same for you.

Schedule an appointment by calling 941-906-7585 or filling out our contact form.

Note: 

The information in this blog post is for reference only and not legal advice. As such, you should not make legal decisions based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.