Estate Tax Portability Rules: Everything You Should Know

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Paul Sundin, CPA

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The estate tax portability rules could save you thousands or even millions of dollars when passing your estate down to your heirs. Understanding how it works and when to file is key to saving money on your estate.

How Does Estate Tax Portability Work?

Estate tax portability applies to married couples only. If one spouse dies before another and doesn’t use 100% of his/her estate tax exemption, the surviving spouse can use the remaining exemption plus his/her own exemption when they die.

The federal tax exemption helps married couples use their entire tax exemption even if one spouse dies without using the entire amount. Prior to December 17, 2010, portability didn’t exist, so any unused portion of the federal estate tax exemption went to waste.

How Much is the Federal Estate Tax Exemption?

The federal estate tax exemption changes annually based on inflation. In 2021, it’s $11.7 million and in 2022 it increases to $12.06 million for single filers and $24.12 million for married couples.

Since the exemption is so high, most people don’t pay estate taxes. However, if an estate is worth more than the federal estate tax exemption, the estate tax rate is 40%. Any amount beyond the exemption would be subjected to the 40% tax.

When Did Estate Tax Portability Start?

The estate tax portability rules were first discussed with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (TRUIRJC) in the 2011 tax year. The rules were put into effect until January 2, 2013, when President Obama signed them into ruling.

This was just the estate tax portability rules, though. As of that time, the estate tax exemption was much lower. The Tax Cuts and Jobs Act increased the federal estate tax exemption in 2018 and it has increased since then, adjusting with inflation, so it’s no surprise that the exemption is higher for 2022.

The TCJA goes through 2025, though, which means if the Act isn’t renewed by Congress the exemption amounts can fall drastically. 

How to Claim Estate Tax Portability

To claim estate tax portability, the estate tax representative must file an estate tax return within 9 months of the first spouse’s death. If the estate needs more time to file for portability, they can apply for a 6-month extension. When filing the taxes, it’s important to select the portability election to have the benefits transferred to the surviving spouse.

Examples of Estate Tax Portability

To understand estate tax portability rules, let’s look at two scenarios – one where the portability rules aren’t in place and one where they are in effect.

No Portability Rules

With no portability rules in effect, any amount of an estate passed down to heirs in excess of the federal exemption limit is taxable at 40%.

Let’s say Joan and Mark are married. Joan dies in 2019 and has an estate worth $20 million. All of her assets are owned jointly with Mark (legally), so all assets transfer to Mark without incurring any tax liabilities strictly because they are married.

When Mark dies in 2020, his estate is still worth $20 million since he inherited 100% of the rights to the assets upon Joan’s death, he must pass down an estate worth $20 million. The federal tax exemption in 2020 was $11.4 million, which leaves $8.6 million subject to 40% tax without portability rules.

With Portability Rules

Now let’s look at the situation with portability rules in effect. Since Joan and Mark are married, they are eligible for the portability rules. Joan died in 2019 when the married filing jointly estate tax exemption was $22.8 million. Her joint estate was worth $20 million. Because they were married at the time of death, no taxes are due since Mark inherits all the assets tax-free.

When Mark dies in 2020, he is able to take advantage of the estate portability rules which means he gets the federal tax exemption that Joan didn’t use ($11.4 million) plus his $11.4 million. Since the testate is still worth $20 million, he can pass down his estate to his heirs without incurring any taxes.

If his estate was worth over $22.8 million, though, any amount above it would be taxable at 40% to his heirs.

Final Thoughts

The estate tax portability rules save your estate from almost being cut in half when sent to your heirs. The key is to file for estate tax portability on time. Normally, you have 9 months from the date the first spouse dies, but you can file for that 6-month extension if necessary.

It’s important to get help from your estate attorney and/or tax advisor to ensure you don’t lose out on this valuable estate tax exemption. It could make a difference of thousands or even millions of dollars depending on the size of your estate.

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Estate CPA

Gilbert, AZ