Estate Tax Portability
Current Exemption Amount (for 2015)
In 2015, every person may leave or give away up to $5.43 million without owing any estate tax. In effect, very few estates will be subject to the death tax at this amount. The exemption amount is indexed for inflation each year and will slowly rise above the current $5.43 million unless and until Congress tinkers with the estate tax and estate tax exemption amount.
‘Portability’ for Spouses
One popular feature of the current estate tax law is that spouses can combine their estate tax exemptions, effectively letting married couples give away or leave almost $11 million without owing tax. The new law makes this feature, called “portability” by tax experts, permanent.
This is how you make the portability election under current tax law. If the first spouse to die doesn’t use up his or her individual gift/estate tax exemption, the surviving spouse can use what’s left. The surviving spouse can do that by filing a 706 estate tax return, even though the first to die spouse did not have a gross estate or taxable estate that required the filing of a 706 estate tax return. In so doing, this gives the couple a total exemption of twice the individual exemption amount. They can share that total exemption amount in the way that provides the greatest tax benefit.
Using hypothetical numbers as an example, if each member of a couple has $4 million in assets, and the first one to die leaves everything to the other, no estate tax is owed because property left to a spouse is tax-free. When the survivor dies and leaves $8 million ($4 million plus the $4 million inherited from the other spouse) to their children, no estate tax will be due, even though the estate is over the exemption amount, because the estate can use some of the first spouse’s unused exemption.
As stated above, to take advantage of the portability rule, a 706 estate tax return must be filed when the first spouse dies regardless if an estate tax liability exists or not. Commentators and tax practitioners point out that this will increase the work-load on the IRS without generating any tax revenue as the IRS will now have to process 706 estate tax returns that report $0.00 in tax liability owed to the Treasury. It is anticipated CPAs and tax attorneys should see an increase in their 706 filings as the 706 estate tax return can be very complicated indeed.
