Ensuring the Estate Planning Tax Exemption is Portable

Since 2010, it’s been easier for married couples to maximize the use of each spouse’s Estate Planning tax exemption. Estate planning professionals call this portability, though the word isn’t used in the tax law.

It works like this. The estate of the first spouse to pass away is exempt from estate taxes up to $5.25 million in 2013. If that spouse’s taxable estate was worth less than $5.25 million, the unused exemption amount transfers to the surviving spouse. When the survivor eventually passes away, he or she can exempt more than $5.25 million of assets by using his or her own exemption plus the unused exemption of the deceased spouse. Together they’re sure of exempting up to $10.5 million in 2013.

Consider Max and Rosie Profits with a net worth of $8 million, $6 million in Max’s name and $2 million in Rosie’s name. Rosie passes away first. Before 2010, her estate would be exempt from taxes, but the unused exempt amount would be lost. Max and Rosie would have been advised to ensure each spouse had legal title to assets worth the same amount.

Under current law, Rosie’s estate still is exempt, but that unused estate tax exemption of $3.25 million can be transferred to Max. His estate will have both his own exemption of $5.25 million in 2013 plus Rosie’s unused $3.25 million exemption, for a total of $8.5 million. Max’s exempt amount is increased for inflation each year he lives after 2013, but Rosie’s unused amount is fixed at her death.

To secure the portability of the first spouse’s unused exemption, the estate executor must follow IRS rules. In particular, the estate of the first spouse to pass away must file an estate tax return, even if the estate is exempt from filing a return because no tax is due. The return must be filed within nine months of the date of death, though a six-month extension is available. If the executor fails to file a return or misses the deadline, there is no portability and the unused exemption is lost. The executor when filing the return can elect not to allow portability if for some reason you want that or he decides that’s best.

It’s important that you name an executor who knows to file an estate tax return, even when one is not required, in order for your unused exemption to be portable for your surviving spouse. Filing an estate tax return should be automatic now for someone who was married, regardless of the estate’s value.