A Great Way to Minimize the Federal Estate Tax with Portability

You may be surprised that for most people, the federal estate tax is a voluntary tax. It is an old saw among estate planning attorneys that “you only pay if you don’t plan.” With recent changes in the federal estate tax law, portability provides a backup tool for those who fail to do lifetime estate tax planning. As a result, you may be able to minimize and eliminate federal estate taxes even if you did no planning. Here is how it works.

This new tool given to us by the tax law, called portability, allows married couples to use two estate tax exemptions. The result could be significant amounts in estate tax savings even if there was no lifetime planning and without dividing the couple’s assets. This option was first in the tax law in 2010 but Congress said it would be temporary. Nobody wanted to use it in 2010 just because it was temporary. In 2013, it became permanent and is now considered a great tool for many married couples.

The Important Points to Remember

  • Lifetime estate planning is still essential for everyone. Lifetime estate planning protects individuals, their families and their assets. Estate planning is about so much more than taxes and money.
  • Failing to take advantage of this great tool can cause tremendously high tax bills for married couples at the second person’s death.
  • Even if a married couple does not plan during their lifetime, this great new tool called portability allows married couples to use both their exemptions.
  • This great tool is not automatic. An estate tax return must be filed after the death of the first spouse. Generally, it must be filed within nine months.
  • There are so many reasons that are non-tax reasons and non-money reasons that trust planning is still highly useful and very much recommended. We still need to plan for asset protection, privacy protection and family line protection, the list goes on and on. All of these things can still be used with or without portability.

How Portability Works

In 2013 portability was made permanent. Congress also made the $5,000,000.00 federal estate tax exemption permanent with increases every year for inflation. As a result, the vast majority of families do not need to worry about federal estate taxes.

If you qualify for this great tool and you need to use this tool, portability allows your surviving spouse to use your estate tax exemption plus your deceased spouse’s unused estate tax exemptions, allowing the transfer of up to $10 million plus in assets with no estate taxes. This can save millions in unnecessary tax dollars. You qualify to use this if you file the form 706 (your attorney or CPA will probably need to do this), your net estate is more than $5,000,000.00 at your death and you are married at your death.

Portability is available after the death of the first spouse. As a result, it is a tremendously valuable backup plan for couples that never got around to lifetime estate tax planning. I cannot emphasize this enough: portability is not automatic. In order to preserve portability, you must file an estate tax return – that is, Form 706. The estate tax return must be filed within nine months after the death of the first spouse. An extension can be granted. If the return is not filed in a timely manner, the surviving spouse forever loses the deceased spouse’s unused exemption amount. Therefore, you need to file for it and qualify for it in time or lose it.

Lawyers like to use initials and acronyms so some lawyer came up with “DSUE” for the deceased spouse unused exemption amount.

Here is something that is kind of cool: remarriage does not change the identity of the most recent deceased spouse, and the surviving spouse can use multiple DSUE’s.

Check out this example:

Tom and Cindy are married for many years. When Tom dies, Cindy’s attorney files an estate tax return electing portability. Cindy gets over Tom and then marries John. Then, she uses Tom’s DSUE during her lifetime to make gifts to her and Tom’s children. 

Cindy then outlives John. Cindy’s attorney then files an estate tax return for John’s estate, making John’s DSUE portability available. When Cindy dies, her estate can still use both her exemption and John’s deceased spouse unused exemption amount. As a result, Cindy is able to use all three federal estate tax exemptions and completely avoid federal estate tax on nearly $16,000,000.00 in assets. 

Again, one has to remember that if Cindy had not used her first husband, Tom’s, DSUE before John died it would have been wasted because John would have become her most recently deceased spouse. 

What You Need to Know

Estate planning can be used with or without portability. Estate planning and trust planning is still very important for couples and single people with any size estate. Everyone needs at least some basic estate planning.

When there are children involved, particularly from prior marriages or relationships, trust planning can allow the first spouse who dies to provide for the surviving spouse and provide for his children and maintain control over who will eventually receive his or her share of the estate.

In addition, trust planning can protect privacy and assets. It protects privacy by avoiding probate. Your living trust goes to work for you the day you sign it.  It can protect assets from a beneficiary’s irresponsible spending, creditors, medical crises, lawsuits and divorce proceedings, allowing the assets to remain in the family for generations to come. We also can have trust assets provide for the special needs of the beneficiary without losing valuable government benefits.

Actions to Consider

  • Discuss estate taxes with your estate planning team. In South Dakota we do not have to worry about state estate taxes, but good old Uncle Sam is there eying our wallets at every turn.
  • When a spouse dies talk to your attorney about whether using portability is appropriate for you. In particular, if you are young and there is a lot of time for your estate to grow, portability may be just the ticket.
  • If a subsequent spouse is seriously ill talk to your estate planning attorney about using remaining DSUE to make lifetime gifts to beneficiaries using the prior spouses DSUE.
  • Talk to your estate planning attorney about generation skipping transfer tax. Remember, generation skipping transfer tax exemptions are not portable and we need specific planning for generation skipping transfer taxes.
  • When your spouse dies be sure the estate tax return, Form 706, is prepared and filed by a qualified professional such as an estate planning attorney. Talk to your estate planning team about non tax trust protection such as asset protection, creditor protection, family line protection and privacy protection that only a trust can offer.

Call me to set up an appointment to discuss or review your estate plan.  There is no charge to review your existing plan and your planning needs.

Thank you for reading my blog.

Doug Thesenvitz