The Power Of Portability

One of the key provisions of ATRA is to make permanent the so-called portability of the applicable exclusion amount between spouses, which was enacted by Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Terms of art can be interesting, to say the least. You know, those arcane words with special meaning only to those in the daily business of using them. Take “portability,” for example. Outside of the American Tax Relief Act of 2012 (ATRA), this word may appropriately describe the movable nature of such things as jobsite restroom facilities or “boom boxes.”

While the concept of “portability” is not entirely new, it is a fairly important tax concept for all married couples.

In fact, a recent Forbes article titled “Estate Tax Portability – New Paradigm For Estate Planning” is a primer of sorts for couples still unfamiliar with the concept now become law. Simply put, with the advent of “portability,” most married persons do not need to worry about maximizing the estate/gift tax exemption of each spouse. Before ATRA, every one was given a one time unified credit against estate tax.  That credit would shelter varying amounts the individual’s estate from estate tax.  In the case of couples, however, a good estate plan had to craft special trusts and other estate planning devices to ensure the opportunity for the couple to take advantage of their combined unified credits.  Portability now allows a couple to pass the unused portion of the unified credit of the first spouse to die to the surviving spouse without the necessity of complex trusts or other devices.

Under ATRA the estate/gift tax exemption amount for each spouse is “portable” between spouses. Consequently, not only can the surviving spouse inherit all of the couple’s assets, but can inherit the exemption amount attributed to the deceased spouse. This “portability” benefit is not, however, automatic and what appears simple can become complex.

Utah still couples its estate tax to the Federal estate tax.  As a result, Utah has adopted the Federal “portable” unified credit. As a result, Utah estate tax has become irrelevant.

The surviving spouse is required to file the correct tax forms (i.e. IRS Form 706) to claim the unused estate/gift tax exemption of the deceased spouse. Fail to do the paperwork and you fail to get the benefit of portability.  Once again proper planning with an experienced estate planning attorney is critical.

Reference: Forbes (July 20, 2013) “Estate Tax Portability – New Paradigm For Estate Planning”