Not All Wealth Transfers Are “Portable”

“Portability” means the surviving spouse can use the deceased spouse’s unused exclusion amount without having to create complex trusts or use other tax-saving techniques. This provision was designed as a simplification effort. But many people may need to hire an expert to make sure they understand all the fine print.

For the most part, we are still scrambling to come to terms with the tax changes enacted at the end of last year with the American Taxpayer Relief Act (ATRA). The ATRA involves more than tax math and even includes some novel notions. One of those notions relevant to estate planning is the concept of “portability.”

A recent Q&A in The Wall Street Journal reveals that the “Gift-Tax Exclusion Isn’t ‘Portable’.” Consequently, there are some important lessons to draw from this.

The concept of “portability” first arose in 2011. Essentially, “portability” is a feature of your unified credit. The unified credit is a fancy term for the amount you can exclude from taxation either by way of gifting during your lifetime or through bequests after death. Under current tax law, you get one unified amount ($5.25 million under current law) to use either in life or in death. If unused by one spouse at death, the amount becomes “portable” in that such spouse can pass any unused credit to their surviving spouse in much the same way they pass their assets.

This is not the same as your annual gift tax exclusion, which is the amount you or anyone can give during the course of any given year without taxation or effect upon your lifetime gift tax exclusion (aka unified credit). Your annual gift tax exclusion is not “portable.”

Once we get used to it, “portability” may be a real time-saver and could simplify many estate plans. In the interim, however, it is strange in its novelty compared to traditionally-accepted estate planning techniques.

Even if you are not susceptible to the estate tax at its current level, you might want to investigate how “portability” may impact your own estate planning. Note: the benefits of “portability” are not automatic and require some very specific steps to enjoy it.

Reference: The Wall Street Journal (June 22, 2013) “Gift-Tax Exclusion Isn’t ‘Portable’”