My husband and I live in Sioux Falls and are close to retiring. We want to create an estate plan and keep hearing about the term "portability." What is "portability"?

"Portability" allows married couples to take full advantage of each other’s unused federal estate and gift tax exclusion amounts.

Let’s look at a hypothetical Sioux Falls couple: John and Jan Jones. 

The Jones had $6 million in total assets, and their individual wills transferred all assets to the surviving spouse.  When John died in 2008, Jan inherited all his assets without incurring any federal estate taxes, because of the federal unlimited marital deduction.  John's federal estate tax exclusion, however, was wasted.  So, when Jan died in 2009 with $6 million in assets, her estate was able to take advantage of her personal federal estate tax exclusion only, not John's.  In 2009, the federal exclusion was $3.5 million.  As a result, $2.5 million of Jan's estate was subject to federal estate tax, at a 45% tax rate.

Now let’s look at how this scenario would change under current law, which permits portability of any unused federal estate tax exclusion to be transferred to a surviving spouse.  If John had died in 2011, the personal representative of his estate could have elected to use the unlimited marital deduction to transfer John's unused $5 million federal estate tax exclusion to Jan.  If Jan dies in 2013 with the $6 million in assets, her estate will have a total of $10,250,000 in federal estate-tax exclusions: the $5 million transferred from John (which was not indexed to inflation after John’s death) and her own $5,250,000 exclusion amount (which was indexed for inflation).  As a result, none of the $6 million estate would be subject to federal estate tax.

 

Scott Swier
Founding Member, Attorney At Law