The concept of estate tax portability is an essential idea when it comes to estate planning and estate tax preparation. A lot of people go into the estate planning process believing that the estate tax is a significant potential problem. After all, you have worked hard for your money, and you do not want to have to pay taxes on any inheritances you might give after you die.
However, the estate tax issue has become much less significant in recent years because of some key developments in the law. To help you better understand estate tax portability and why it significantly reduces the potential impact that estate taxes might have on your state, let’s take a look at some key issues.
Once you die, you leave behind property, including both debts and assets. This property is collectively known as your estate. This estate is subject to the federal estate tax, and also is subject to estate tax in your state of residence. If your estate is worth a certain amount, your estate administrator will have to pay a portion of its value in estate taxes.
The estate tax applies to every estate, but that doesn’t mean every estate will have to pay an estate tax. The federal tax code allows for individual estate tax exemptions. As of 2014, the individual exemption was $5.25 million per person. This means that if you leave behind an estate worth $5.25 million or less, your estate will have to pay no money in estate taxes. However, the New York estate tax exemption is only $1 million, so if you leave behind an estate worth $1 million or more your estate may have to pay estate taxes to New York State unless you have implemented an estate plan that can avoid those taxes.
Married people may be able to combine their individual exemptions through a process known as portability. Under current law, portability allows a surviving spouse to use the portion of the exemption a deceased spouse failed to use.
For example, let’s say a married woman died in 2013 leaving behind an individual estate worth $4 million. Her husband died later that same year, leaving behind an estate worth $6 million. Without portability, his estate would’ve had to pay estate taxes because the $6 million he left behind exceeded the $5.25 million exemption limit.
However, if properly elected, portability will allow his estate to avoid having to pay estate taxes. This is because the wife died only using $4 million of her exemption. Her husband can use the $1.25 million in estate tax exemptions her estate did not use by adding it to his own exemption limit, giving him an effective exemption amount of $6.5 million. Since he left behind an estate worth less than that, his estate would not have to pay any federal estate taxes.
Many estate planning attorneys do not recommend relying on portability, however. This is a very new provision of the tax code, and there is no guarantee how long it will be available. If you have an estate that is large enough to be concerned with the estate tax, the best option is to consult with an experienced estate planning attorney.