Portability – The great estate tax break

You can’t take a tax break with you, but it’s becoming easier to leave to your beneficiaries. The IRS released final rulings detailing an estate and gift-tax break for married couples, known as “portability”. It allows a married spouse to pass nearly $11m in assets to heirs, free of estate tax. Without this, couples would only qualify for one exemption, as opposed to two.

The exemption, indexed for inflation, is $5.43m per individual in 2015. But the rules come with important caveats. Estate tax returns must be filed, usually within nine months of death, to take advantage of portability. Experts worry that executors will overlook this deadline, especially if an estate is smaller than the exemption and there is no reason to file a return.

Since ’81, the laws have allowed spouses to leave assets to one another free of tax. But at the 2nd death, only one exemption is left. Planners devised trusts to deal with this issue, but they can be costly and cumbersome. People should be willing and able to plan for the future.

Portability allows the surviving spouse to pick up the remaining portion of the partner’s gift and estate-tax exemption if the executor makes an election on Form 706, the estate tax return. In addition, portability doesn’t prevent the survivor’s estate from getting a benefit at death, which can cancel or reduce future capital gains tax on assets. If a couple’s combined assets are less that in this example (perhaps below $5m) experts still recommend taking advantage of portability because assets can grow, especially if the 2nd death is decades away.

For most people who aren’t rich, the downside of portability is the cost of estate-tax preparation, which requires professional help. The good news is that if the assets are below the $5.43m limit, expensive appraisals aren’t mandatory. The executor can file a list with reasonable estimates.

These new rules are likely to increase a rise in federal estate-tax filings, which totaled $34,000 in 2015. They also may increase business for accountants, enrolled agents, and lawyers to prepare estate-tax returns.

Source: WSJ- July, 2015