Understanding Portability in Estate Planning

Portability is an essential concept in estate planning, allowing spouses to combine their estate and gift tax exemptions. This strategic tool ensures that a surviving spouse can utilize any unused estate tax exemption from their deceased partner, thereby maximizing the available exemption to protect their assets from excessive taxation.

What is Portability?

Portability enables a surviving spouse to inherit the unused portion of the estate tax exemption from their deceased spouse. This means the surviving spouse can use both their own exemption and the unused exemption of the deceased, effectively doubling the amount that can be shielded from estate and gift taxes.

Background on Estate Tax and Portability

The federal gift and estate tax applies to transfers made during life and at death. Each individual currently has an exemption of $13.06 million (as of 2024), which can be used to offset taxable transfers. Gifts made to a U.S. citizen spouse or certain trusts for their benefit typically do not use this exemption. Portability allows the surviving spouse to pick up the unused exemption, preventing estate tax liability that might arise if one spouse leaves all assets to the other.

How to Elect Portability

Portability is not automatic. To benefit from it, the deceased spouse’s estate must file a federal estate tax return and elect portability within nine months of the spouse’s death, with possible extensions. This crucial step enables the surviving spouse to utilize the unused exemption.

Advantages of Portability

The primary advantage of portability is flexibility. It allows couples to plan their estates and transfer assets according to their wishes, using the combined exemptions to reduce or eliminate estate taxes. This flexibility helps manage the estate effectively and fulfill the couple’s estate planning goals.

When to Consider Portability

While portability offers significant benefits, it may not always be necessary. For individuals whose estates fall below the exemption threshold, the cost and complexity of filing an estate tax return might outweigh the benefits. Families should evaluate the potential costs and benefits of electing portability in consultation with their estate planning attorney.

Limitations of Portability

Portability has several limitations:

• State Estate Taxes: While California does not have a state estate tax, many other states do. In those states, portability may not apply at the state level. Additional estate planning may be required for those with estates in states with their own estate taxes.
• Overreliance on Portability: Assuming portability will always be elected can lead to complications. If not properly elected, all assets may end up in the surviving spouse’s estate, triggering estate tax.
• Generation-Skipping Transfer (GST) Tax: Portability does not apply to the GST tax exemption, which allows transfers to grandchildren and further descendants without additional taxes. Other planning options may be necessary for long-term family wealth management.
• Last Deceased Spouse Rule: Portability only applies to the unused exemption of the last deceased spouse. Individuals cannot accumulate exemptions from multiple spouses over time.

Final Thoughts

Portability provides substantial flexibility in estate planning, allowing couples to maximize their estate and gift tax exemptions. By enabling the transfer of unused exemptions, it simplifies the estate planning process and reduces tax burdens on surviving spouses. However, it requires careful consideration and timely action to elect properly.

For personalized advice and to ensure your estate plan fully leverages the benefits of portability, schedule a confidential consultation with Estate Planning Attorney Jonathan Alexander. Call (949) 334-7823 to protect your legacy and secure your family’s financial future.