What is portability?

A new feature of the current estate-tax laws is a concept called “portability.” Remember that 2015 $5.43 million exemption amount for federal estate taxes I mentioned? It makes any unused exemption of the first spouse to die “portable” and carries over to the surviving spouse.

For example, Hank and Wilma are husband and wife. They have an estate that is equally owned by them worth $2,000,000.00. Hank dies in 2015 and his $1,000,000.00 share of the estate is left to Wilma. Hank is also able to use the “portability” laws to give Wilma his unused portion of the exemption, which in this simplified example, is $4.43 million. When Wilma dies, and assuming the same estate tax exemptions, Wilma will be able to pass on $5.43 million (Wilma’s exemption amount) plus Hank’s $4.43 million without owing any federal estate tax. In reality, it’s not quite this simple, but it illustrates the concept.

There are downsides to portability: you have to file the same tax return as an estate that owes estate tax. It’s a very detailed form that:

  1. takes time and expense to prepare properly,
  2. It does not apply to unused generation skipping transfer (GST) tax exemption;
  3. has to be coordinated with any probate proceedings with the applicable court, and
  4. sometimes involves additional (to the probate lawyer) outside tax counsel, whether CPA or tax attorney.

Further, if the surviving spouse remarries, they may lose the portability from the first spouse that died. If they had planned with a bypass trust, this would not be an issue on remarriage.

This means that many estates that wouldn’t normally think of doing an estate tax return at probate now face the decision of spending extra time and money on filing for portability. People with high net worths may choose to do one in order to capture the portability advantages, particularly if there is a good chance that the surviving spouse’s assets will grow substantially before the surviving spouse’s death.