Estate tax portability refers to a provision in the United States tax code that allows a surviving spouse to utilize any unused portion of their deceased spouse's estate tax exemption. This provision was introduced as part of the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 and made permanent by the American Taxpayer Relief Act of 2012.
Under the estate tax system, each individual is granted an exemption amount, which is the value of assets they can pass on to their heirs without incurring any federal estate tax. As of 2021, this exemption amount is set at $11.7 million per individual. However, prior to the introduction of portability, any unused portion of this exemption would be lost upon the death of the first spouse.
With estate tax portability, if one spouse passes away and does not utilize their full exemption amount, the surviving spouse can elect to use the deceased spouse's unused exemption amount in addition to their own. This effectively allows the surviving spouse to potentially double their estate tax exemption.
To take advantage of estate tax portability, the executor of the deceased spouse's estate must file an estate tax return
(Form 706) within nine months of their death, even if no estate tax is owed. The return must include a computation of the deceased spouse's unused exemption amount, which is then transferred to the surviving spouse.
It is important to note that estate tax portability is only available for married couples, where both spouses are U.S. citizens or residents. Non-resident aliens and same-sex couples in states that do not recognize their marriage are not eligible for portability.
Estate tax portability can have significant implications for estate planning. It provides married couples with an opportunity to maximize their combined estate tax exemptions and potentially reduce or eliminate estate taxes
upon the death of the second spouse. This can be particularly beneficial for couples with substantial assets who wish to preserve wealth for future generations.
However, it is crucial to consider that estate tax laws are subject to change, and the exemption amounts can be adjusted by Congress. Therefore, individuals and couples should regularly review their estate plans and consult with qualified professionals to ensure they are taking full advantage of available tax-saving strategies, including estate tax portability.