Portability helps with estate tax efficiency.
Taxes are a fact of life.
We know we have to pay them.
We hope we do not have to pay a lot.
Tax efficiency is an important part of estate planning.
According to a recent The Monterey Herald article titled “Financial planning: What you need to know about portability,” when it comes to estate tax planning, portability helps simplify this process.
The current federal lifetime estate tax exemption is $11.4 million per person.
This means you can leave up to this amount to your family without subjecting the assets to an estate tax.
The estate tax is 40 percent on the assets above this threshold.
A significant cut by any measure.
Portability will apply in situations involving married couples.
Let us say a couple has an $18 million estate.
The husband dies first leaving his estate to his wife.
He did not use any of his exemption.
With portability, his exemption amount is added to the exemption amount of his wife.
This means his $11.4 million plus her $11.4 million equals a $22.8 million exemption.
When she dies and passes her $18 million onto her children, no estate tax will be due to the federal government
Without portability, the combined estate passing to the children would take a "haircut" of 40 percent, or $6.6 million over the exemption amount.
Beware: Portability is not automatically applied to the estate of the surviving spouse.
He or she must claim the unused tax exemption.
To do so, the executor must file IRS a Form 706 tax return within nine months of the date of death for the deceased spouse.
If more time is needed, you can request an automatic six month extension.
Reference: Monterey Herald (February 27, 2019) “Financial planning: What you need to know about portability”