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Estate Tax Portability Election

Estate Tax Portability Election

Executive Summary Under current law, up to $11.7 million per person (or $23.4 million for married couples) can be gifted or transferred upon death, tax-free. Generally, a Portability Election for the unused amount of this exclusion (i.e. DSUE) would allow the surviving spouse to utilize the unused portion in addition to their own $11.7 million […]

Executive Summary

Under current law, up to $11.7 million per person (or $23.4 million for married couples) can be gifted or transferred upon death, tax-free. Generally, a Portability Election for the unused amount of this exclusion (i.e. DSUE) would allow the surviving spouse to utilize the unused portion in addition to their own $11.7 million exclusion. Failure to make the Portability Election in a timely manner does not automatically disqualify one from utilizing this valuable election. The IRS provides for an extended period of relief to make a delinquent election under certain circumstances.

Background

The current lifetime Estate and Gift Tax Exclusion is $11.7 million per person ($23.4 million for married couples that wish to make tax free transfers of wealth). This amount is adjusted for inflation annually, but it is set to expire at the end of 2025, and will be decreased to ~$6.5 million (2010 exclusion of $5 million indexed for inflation).

If a taxpayer dies with a residual estate, $11.7 million of the estate value can be excluded from transfer or inheritance taxes, reduced by the amounts that were gifted or transferred during the decedent’s lifetime. Furthermore, there may not even be a requirement to file an Estate Inheritance Tax Return (Form 706).

The Portability Election of the DSUE (deceased spouse unused exclusion) is the ability to preserve and port over a decedent’s unused lifetime exclusion to the surviving spouse. The surviving spouse can then apply this DSUE received against any tax liability arising from subsequent lifetime gifts of the spouse or transfers upon death of the spouse. The ported exclusion amount does not get indexed for inflation or changes in law.

This Election can have enormous implications on Gift and Estate Transfer Taxes given that the tax rate for transfer taxes is exceedingly high (40%). The election is submitted with a timely filed Estate Inheritance Tax Return (Form 706) upon the death of a taxpayer. The beneficiaries will ultimately pay the price in the form of additional estate taxes if no portability election is invoked.

If a Portability Election was not made because the Estate was below the taxable threshold, and as a result the Inheritance tax return was deemed unnecessary, there may still be time for this election. The IRS provides for an extended period of relief to port over the DSUE to the surviving spouse depending on the facts and circumstances unique to the situation. We encourage you to reach out and discuss with the tax professionals at Fasten Halberstam LLP.

Other Tax and Estate Planning Considerations

We also recommend that taxpayers consider gifting strategies to transfer wealth to the next generation in a tax beneficial manner given that the estate transfer tax rate can be as high as 40%.