Estate planning involves a variety of strategies to help individuals and families protect their wealth and ensure a smooth transfer of assets to heirs. One powerful, yet often overlooked, tool in estate planning is portability. Although portability is a federal estate tax benefit, understanding how it works can play an essential role in maximizing wealth preservation for married couples in California. Here’s a closer look at what portability is, how it works, and how it can impact your estate plan.
What is Portability?
Portability is a federal estate tax provision that allows a surviving spouse to inherit any unused federal estate tax exemption from their deceased spouse. The estate tax exemption is the amount that individuals can pass on to heirs tax-free. In 2024, the federal estate tax exemption is $13.61 million per individual, meaning that individuals can pass this amount of assets to their beneficiaries without incurring estate tax.
With portability, a surviving spouse can add their deceased spouse’s unused exemption to their own, effectively doubling the amount they can pass on tax-free. For example, if one spouse dies without using any of their $13.61 million exemption, the surviving spouse could have an exemption of up to $27.22 million, potentially shielding more of the couple’s combined estate from federal estate taxes.
Why Portability Matters in Estate Planning
Portability is significant because it allows couples to maximize their estate tax exemptions without complex trust structures. By transferring the unused exemption, the surviving spouse can preserve more wealth for their heirs and reduce potential tax burdens on the estate. This flexibility can be especially beneficial for couples whose combined estates are close to or exceed the federal estate tax threshold.
While California doesn’t impose its own estate tax, large estates may still face federal estate taxes. For couples with high-value assets, taking advantage of portability is a way to maximize the estate tax benefit, protect family wealth, and simplify the estate planning process.
How Portability Works: Step-by-Step Guide
To use portability effectively, it’s essential to understand how it works and the steps required to secure it. Here’s a guide to how portability works:
Step 1: Determine if Portability is Needed
When one spouse passes away, the executor of the estate determines whether the estate tax exemption is fully used. If the estate’s value is below the federal estate tax threshold, the unused portion of the deceased spouse’s exemption may be eligible for transfer to the surviving spouse.
Step 2: Filing the Estate Tax Return (Form 706)
To elect portability, the executor must file an Estate Tax Return (Form 706) with the IRS. Even if no estate tax is owed, filing Form 706 is necessary to preserve the deceased spouse’s unused exemption amount (DSUE). The estate tax return must be filed within nine months of the spouse’s death, with an option for a six-month extension if requested.
Step 3: Calculating the DSUE Amount
The DSUE amount is the portion of the deceased spouse’s estate tax exemption that was not used. If the deceased spouse’s estate is valued at $4 million, for instance, they have $9.61 million in unused exemption. This $9.61 million becomes the DSUE amount and can be transferred to the surviving spouse.
Step 4: Surviving Spouse Uses the DSUE
Once portability is elected, the surviving spouse can add the DSUE amount to their own exemption. If they eventually have a taxable estate, they can use this combined exemption to shield assets from federal estate taxes. This combined exemption applies to both lifetime gifts and assets transferred at death.
Example of Portability in Action
Let’s say that Bob and Jane are a married couple, and each has a federal estate tax exemption of $13.61 million. If Bob dies and leaves his entire estate to Jane, his estate may not use any of his exemption, as assets left to a spouse qualify for the unlimited marital deduction (meaning they’re not subject to estate tax).
By filing for portability, Jane can add Bob’s unused $13.61 million exemption to her own, giving her a total exemption of $27.22 million. This means that if Jane’s estate is worth up to $27.22 million at her death, her estate will not owe federal estate tax, maximizing the wealth passed to heirs tax-free.
Advantages of Using Portability in Estate Planning
1. Maximizes Tax-Free Transfers to Heirs
Portability allows couples to fully use both spouses’ estate tax exemptions, effectively doubling the amount they can pass on without incurring federal estate taxes. This can be crucial for high-net-worth couples who want to protect as much of their wealth as possible.
2. Simplicity and Flexibility
Unlike more complex estate planning tools, portability is relatively straightforward to implement and doesn’t require creating additional trusts or altering asset ownership. This simplicity can save time and reduce legal fees.
3. Protects Against Future Tax Law Changes
Portability provides some protection against future reductions in the federal estate tax exemption. By securing the unused exemption now, couples can ensure they benefit from the current exemption limits, even if those limits are reduced in the future.
4. Preserves the Estate for Surviving Family Members
By reducing or eliminating estate tax liabilities, portability helps ensure that more of the estate’s assets go to family members, rather than being lost to taxes.
Limitations and Considerations of Portability
While portability offers many advantages, there are some important limitations and considerations to keep in mind:
1. No Portability for Generation-Skipping Tax Exemption
Portability only applies to the federal estate tax exemption, not the generation-skipping transfer (GST) tax exemption. For couples with large estates who want to leave assets to grandchildren, other planning tools may be needed to minimize GST taxes.
2. Must File an Estate Tax Return
Electing portability requires filing Form 706, which can be time-consuming and costly. Even if the estate doesn’t owe taxes, the executor will need to provide detailed financial information to complete the return.
3. Portability Only Applies to Married Couples
Portability is only available to legally married couples. Unmarried partners, even those in long-term relationships, are not eligible to transfer unused exemptions.
4. May Not Be Necessary for Smaller Estates
If the couple’s combined estate is well below the federal exemption threshold, portability may not be necessary. For smaller estates, simpler estate planning tools, such as wills or a living trust, may be more appropriate.
Portability vs. Credit Shelter Trusts: Which is Right for You?
Before portability was introduced, married couples commonly used credit shelter trusts (also known as bypass or AB trusts) to preserve each spouse’s estate tax exemption. With portability, some couples may find that a trust is no longer necessary. However, there are still cases where a credit shelter trust may be beneficial:
Asset Protection: Trusts can provide added protection for beneficiaries against creditors or potential divorces.
Control Over Asset Distribution: Trusts allow for specific instructions on how and when assets are distributed to heirs, which can be helpful for minor children or beneficiaries who may not be financially responsible.
State Estate Taxes: Some states impose their own estate taxes, which are not affected by federal portability. While California does not have an estate tax, a trust may be beneficial if a surviving spouse relocates to a state that does.
Consulting with an estate planning attorney can help determine whether portability or a trust-based approach is best for your specific situation.
How to Take Advantage of Portability in California Estate Planning
To fully utilize portability in your estate plan, consider the following steps:
1. Communicate with an Estate Planning Attorney
Working with an experienced estate planning attorney can ensure that you understand the benefits and limitations of portability and how it applies to your unique circumstances.
2. Keep Records of the Deceased Spouse’s DSUE Amount
Accurate records of the DSUE are essential if the surviving spouse plans to use the portability exemption later. Make sure the estate tax return (Form 706) is filed and retained.
3. Consider Portability in Long-Term Planning
For large or complex estates, portability should be part of a broader estate planning strategy that may include trusts, tax planning, and asset protection.
Final Thoughts
Portability can be a valuable tool for married couples in California, allowing them to maximize their federal estate tax exemption and simplify their estate plan. By transferring the unused estate tax exemption to a surviving spouse, portability helps protect family wealth, reduce estate tax liabilities, and ensure more assets go to loved ones.
If you’re interested in incorporating portability into your estate plan, consider consulting with a knowledgeable estate planning attorney. They can guide you through the process, help you file the necessary paperwork, and ensure your estate plan is designed to maximize the benefits for you and your family.
Contact the top-rated California trust and probate attorneys Moravec, Varga & Mooney today to schedule a telephonic consultation. Have questions, call (626) 460-1763 or email LV@MoravecsLaw.com.
Southern California Probate Lawyer Serving all counties in California, including Los Angeles, Riverside, San Bernardino, Sacramento, Santa Cruz & Beyond.
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