Estate planning impacts everyone, regardless of whether or not their estate will be taxable. Therefore, proper care should be taken in the planning process. With the estate lifetime exclusion amount currently set at $5.43 million for 2015, the majority of individuals do not need to worry about filing an estate return, as their estates are not taxable. However, what happens if their spouse’s estate would end up being taxable? 
One important estate planning tool to consider, in this case, is portability, which is only available when one files a return, even if it would not otherwise be required.
Portability is an informal term that describes the ability to transfer a deceased spouse’s unused lifetime estate exclusion (DSUE) to their surviving spouse. The only way to accomplish this is by timely filing form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, to make the portability election.
When the election is made the DSUE is then treated as being transferred to the surviving spouse and will then be added to their basic exclusion amount. The amount of the DSUE is, essentially, the basic estate exclusion less the value of the deceased taxpayer’s estate. Therefore, if the value of the deceased spouse’s estate is $2.5 million, the DSUE would be $2.93 million ($5.43 million basic estate exclusion minus $2.5 million). This amount can then be used for gifting purposes or for transfers of assets upon the surviving spouse’s death.
The importance of the portability election is very easy to see when the unlimited marital deduction is taken into consideration. The unlimited marital deduction is, essentially, a deduction to the taxable estate for assets that transfer to the surviving spouse. Therefore, this deduction could take an estate that would have been otherwise taxable, to being well below the basic estate exclusion of $5.43 million and, possibly even zero. If portability in this situation is not elected, than that would leave the surviving spouse with additional assets to report on his or her death, with no additional exclusion to help with the increased estate tax burden.
- The DSUE can create other estate tax benefits when considering remarriages. In the case where the surviving spouse remarries, the DSUE from their deceased spouse remains. This can create a case where, when the remarried spouse then later dies, she then has her basic estate exclusion, plus the DSUE from her deceased spouse. The result of this could be that her second spouse benefits indirectly from his deceased spouse’s DSUE.
- If the surviving spouse retains the DSUE from her first marriage, what happens if the second spouse ends up passing during her lifetime? In general, the answer is only the DSUE from the last deceased spouse applies.
With the estate tax at 40%, the ability to use portability can be a simple and significant tax saver. It creates the opportunity to have more assets go through the estate and receive a step-up in basis tax-free. It can also allow the surviving spouse to make additional lifetime gifts without incurring any gift tax. However, it is important to note that the DSUE does not increase with inflation, as the basic estate exclusion does.
Example:
Assume an asset worth $1 million transfers to the surviving spouse, freeing the estate of $1 million of the $5.43 basic estate exclusion. Now she has an asset with a $1 million basis and DSUE of $1 million. She dies 5 years later and the value of the asset is now worth $2 million. Unless she has some of her own lifetime estate exclusion left, her estate will have a $400,000 tax due from that asset ($2 million asset value less $1 million DSUE time’s 40% estate tax rate). The use of DSUE can also extend the statute of limitations and possibly be lost if the surviving spouse remarries.
Estate planning is a complex area of the law, filled with opportunity for most individuals. How can we help? Start by having the conversation; I'm ready to guide, coach and counsel you regarding portability and additional estate planning opportunities.to maximize your financial position, not only for today, but also for a solid future. Connect with us at info@zinnerco.com or phone at 216.831.0733.
