Many people have questions about estate taxes, portability, and what it all means for them. While estate, gift, and generation-skipping transfer tax calculations can be a little intimidating, there are some basic concepts that can help you easily understand them. When it comes to portability, asking the right questions will give you a better understanding of what it means for you, your spouse, and your estate.
Question 1. What is the estate tax?
The estate tax is a federal tax that applies to property left behind by a deceased person. If you die leaving behind property, your estate may, through your estate representative, have to pay a portion of its value as a tax.
Question 2. Do all estates have to pay an estate tax?
No. Federal law allows every estate to exempt a specific amount of property from the estate tax. The exemption is the amount of money your estate gets to keep before it has to pay a single dollar in estate taxes. In 2014, the estate tax exemption limit is $5.34 million. This means that if you die in 2014 and have an estate worth under $5.34 million, your estate will not have to pay any estate taxes at all.
Question 3. What is the estate tax portability?
Estate tax portability applies to married couples who want to use the individual estate tax exemptions together. Essentially, portability allows spouses to combine their individual exemptions.
Here’s how it works. Let’s say you are married and your spouse dies leaving behind an estate worth $3 million. Several years later you die leaving behind an estate worth $6 million. Because your estate is worth more than the $5.35 million exemption limit, your estate would have to pay some estate taxes if you died as a single person.
However, because your spouse died before you did and did not use all of the exemption, there is still a little left over that you can add to your own. If your spouse died leaving behind an estate of $3 million, there would be $2.35 million in unused exemptions. Through portability you can apply a spouse’s unused exemptions to your own. In this situation, your exemption would total $7.7 million. Because your estate is worth $6 million, this means that your estate won’t have to pay a single penny in estate taxes.
However, applying the portability concept to any individual situation does require some careful attention to detail. For example, you’ll have to ensure that your estate administrator files the appropriate IRS form in order to gain the full benefit of portability. For more information about this, contact our office so we can discuss the concept in more depth.
Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.