Cut Your Estate Tax Bill by 40% with the New and Improved Portability Election

Paul Labiner, Esq.

Paul Labiner, Esq.

Managing Partner

Aug 16, 2022

The federal estate and gift tax exemption is historically high—$12,060,000 per person for 2022. This number will adjust for inflation through 2025, but the relevant provisions of the Tax Cuts and Jobs Act will expire end-of-year 2025, at which point the exemption could drop by anywhere from $6 to $7 million, if legislation doesn’t reduce it first.

Obviously, the transfer of such large amounts of money or property cannot be accomplished at the drop of a hat. So, if you intend to make use of your estate and gift tax exemption, now is the time to put the wheels in motion to ensure you don’t stick your heirs with a massive tax bill.

The $12.06 million amount is per person, so a married couple can transfer a combined $24,120,000 free of estate or gift taxes. But what happens if one spouse passes away without having used all of their exemption? The answer: Make a portability election.

Benefits of a Portability Election

Luckily, when a spouse passes away, their remaining estate and gift tax exemption does not disappear. Instead, if the deceased spouse did not use the full amount of their exemption, the surviving spouse can make a portability election by filing an estate tax return, which adds the unused portion of the deceased spouse’s exemption to their own.

Jim and Pam's Estate

For example, Jim and Pam have an estate with a total value of $30 million. Jim gifts $2,030,000 each to his son and daughter. He dies shortly after, with a remaining lifetime exemption of $8 million.

If Pam elects portability of the unused exemption amount, when she herself passes away, $20,060,000 can transfer without incurring federal estate taxes, and only the remaining $5,880,000 would be subject to an estate tax. If Pam does not make a portability election, her taxable estate more than doubles to $13,880,000 ($25,940,000 – $12,060,000 [remaining estate value] – [Pam’s exemption]).

Assuming, for simplicity, a flat 40% estate tax rate, in the world where Pam made the portability election, her heirs had a tax bill of $2,352,000. In the second world where Pam did not make the portability election, her heirs were saddled with a $5,552,000 tax bill, siphoning an extra $3.2 million out of the estate.

Timeframe to Make a Portability Election

Importantly, there is a limited timeframe within which to file the estate tax return to elect portability. Previously the surviving spouse had only two years after the death of the first spouse to file the estate tax return (Form 706) with the IRS.

In a rare good-for-taxpayers move, in July 2022 the IRS extended the period to elect portability to five years. Additionally, taxpayers no longer are required to receive guidance from the IRS (called a private letter ruling) before filing the estate tax return.

Of course, preparing and filing an estate tax return will cost money, but how much depends on the complexity of the estate. In many cases, the tax mitigation benefits will dwarf the upfront costs to prepare the return. In the hypothetical above, the portability election saved Pam’s estate $3.2 million. So, even if Pam had paid $20,000 to file an estate tax return, she still saved $3.2 million!

Pro Tip: Even if one does not file a portability return, the personal representative will still have to calculate the value of the estate, which often requires professional valuations or appraisals. In other words, the costs one would have incurred to file an estate tax return (and, thus, to elect portability) will still be incurred, just at a later stage.

However, your situation is unique, and it is always best to consult with an estate planning attorney to discuss the specifics and determine what is in your and your family’s best interest.

Let’s Discuss

If you have lost a spouse in the last few years, please accept our deepest condolences. However, we urge you not to compound that loss by failing to take advantage of this highly beneficial tax mitigation strategy.

Asset valuation can be quite subjective, so if you think your estate’s value could be anywhere close to the $12.06 million exemption amount, call and schedule a Financial Legacy Review so we can determine the most effective and tax efficient path forward for you and your family.

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