Portability? What Does that Mean?

Portability is a confusing concept in estate planning, but can be an effective tool if you have a high value estate. Every individual has a lifetime estate and gift tax exemption amount. The 2017 exemption amount is $5.6 million, which will double to $11.2 in 2018. Therefore, if you were to die with $5.5 million in assets and lifetime gifts in excess of the annual exclusion amount, your estate would not be subject to the estate tax, which maxes out at 40%! If you have a legal marriage, then you can pass your assets to your surviving spouse without eating away at your estate and gift tax exemption amount. But what does this mean for your $5.6 million/$11.2 million exemption? The surviving spouse can elect portability of the deceased spouse's unused exclusion amount (deceased spousal unused exclusion (DSUE) amount) for the benefit of the surviving spouse.

In order to do so, the estate's representative must file an estate tax return (Form 706). This form must be filed within 9 months of the spouse's date of death. An automatic 6 month extension to file is available to elect portability by filing Form 4768. Only if your estate exceeds the IRS's limits are you required to file an estate tax return. But, to elect portability you can file a "simplified" estate tax return and preserve that portability.

Estates required to file:

A filing is required for estates with combined gross assets and prior taxable gifts exceeding $1,500,000 in 2004 - 2005; $2,000,000 in 2006 - 2008; $3,500,000 for decedents dying in 2009; and $5,000,000 or more for decedent's dying in 2010 and 2011 (note: there are special rules for decedents dying in 2010); $5,120,000 in 2012, $5,250,000 in 2013, $5,340,000 in 2014, $5,430,000 in 2015, $5,450,000 in 2016, $5,490,000 in 2017, and $5,600,000 in 2018. See IRS Estate Tax.