When it comes to estate planning and estate taxes, the idea of portability is an essential concept. Portability is, essentially, the ability to use the unused estate tax exemption that a deceased spouse leaves behind. To help you better understand the idea of portability and how it applies, let us take a look at three key issues you will need to become familiar with.
The Federal Estate Tax
Estate planning is all about looking at what you own and taking steps to prepare for how that property will transfer to others after you die. Your estate is simply the collection of assets and debts that you leave behind. If the value of your estate exceeds a specific amount, your estate will have to pay a certain portion of its value as a tax.
The Federal Estate Tax Exemption
The estate tax is a federal law, and one that comes with a specific exemption amount. When you leave behind an estate, the estate tax will only apply to that property if your estate is worth more than a specific amount. In 2013, the estate tax exemption amount was $5.25 million per individual. In 2014, the exemption amount is $5.34 million per individual. So, if you die in 2014 and leave behind an estate worth $5.33 million, your state will not have to pay any estate tax.
Estate Tax Exemption Portability
When married couples approach the question of estate taxes, they have to look beyond the individual exemption amount. Portability is the idea that you can take your spouse’s exemption limit and add it to your own. Through portability, married couples essentially have an estate tax exemption limit that is double the exemption for individuals. Here’s how it works.
Let’s say a husband died in 2013 leaving behind an estate worth $4 million. That $4 million was not subject to estate taxes because it was under the $5.25 million exemption limit that applied at the time.
Later this year, the surviving wife of the predeceased husband dies leaving behind an estate worth $6 million. Had the wife died as a single person she would’ve left behind an estate that was in excess of the $5.34 million exemption limit. However, because her husband had died before her, she can apply the unused portion of his exemption to her own estate tax exemption amount. So, her estate tax exemption limit would be $5.34 million plus the $1.25 million her husband didn’t use, giving her a total exemption amount of just about $6.6 million. Since the total size of her estate is $6 million, her estate will also not have to pay anything in estate taxes.