It used to be quite common for people to come to estate planning attorneys because they were worried about the estate tax. While the estate tax still exists, it is a much less significant concern than it was even a few years ago. This is primarily because of two reasons. First, the estate tax exemption limit has been set fairly high. Second, the exemption limit is effectively doubled for married couples because of a concept known as portability.
To better understand estate tax portability and why it matters, let us look at some commonly asked questions about this concept.
Question 1. What, exactly, is the estate tax?
The estate tax is the federal tax that applies to the property left behind by a deceased person. This property is collectively known as an estate. When you die, the value of your estate will determine if you have to pay an estate tax. If your estate is in excess of the individual exemption limit, your estate will have to pay taxes.
Question 2. What is the estate tax exemption limit?
Just over a year ago, in January of 2013, Congress passed a law that set the individual estate tax exemption limit at $5.25 million. In 2014, the exemption limit rose (because of inflation) to $5.34 million. This means that should you die in 2014 and leave an estate worth anything under $5.34 million, your estate will not have to pay any money in estate taxes.
Question 3. What is portability?
Estate tax portability effectively allows married couples to use each other’s unused exemption. Let’s say, for example, that one spouse dies in 2014 leaving behind an estate worth $1.34 million. This is well below the $5.34 million exemption limit, so the deceased spouse’s estate won’t have to pay anything in estate taxes.
The surviving spouse dies about a year later, leaving behind an estate worth $9 million. Normally, the second spouse’s estate would have to pay estate taxes because it was worth well over the $5.35 million individual exemption limit. However, the previously deceased spouse only used $1.34 million of the exemption, leaving behind an unused $4 million portion. Through portability, the second deceased spouse can include the unused $4 million exemption in his or her exemption calculation. This effectively means that the second spouse has a $9.34 million exemption limit. Because the estate left by the second spouse is only worth $9 million, this estate would also not have to pay any money in estate taxes.
Like all other tax issues, there are some important steps people have to take to ensure they can benefit from exemption limit portability. You should contact an experienced and qualified estate planning attorney is you would like more information about how to do this.