In the technology world, portability has become increasingly important as people become more mobile and reliant on a variety of devices to access and use information. Portability allows individuals to work remotely or while on the go, without being tied to a specific location or device. And for the last decade, it has been all the rage in estate planning circles as well – except “portability” in this context has nothing to do with flexibility and convenience.
Understanding the Estate Tax Exemption
As of 2023, the estate tax exemption for individuals is $12.92 million, adjusted for inflation. This means that when someone dies and the value of their estate is calculated, any amount more than $12.92 million is subject to the federal estate tax unless otherwise excluded.
But The American Taxpayer Relief Act of 2012 (ATRA 2012), made “permanent” a new concept in estate planning for married couples, ostensibly rendering traditional estate tax planning unnecessary. This concept, called “portability,” means that a surviving spouse can elect to use the deceased spouse’s unused exemption amount, effectively doubling the estate tax exemption for married couples to $25.84 million.
As with most tax laws, however, the devil is in the details. If you read that last paragraph closely, you probably noticed that there is a big if when it comes to portability: the surviving spouse can use the deceased spouse’s unused exemption amount if the decedent’s estate elects to do so.
To make a portability election, the decedent’s estate must file a timely (within nine months) IRS Form 706, which is the “United States Estate (and Generation-Skipping Transfer) Tax Return.” However, an automatic six-month extension of time to file the return is available to all estates, including those filing solely to elect portability, by filing Form 4768 on or before the due date of the estate tax return.
While somewhat confusing, both forms offer helpful instructions for completing and filing the return. For further guidance, we recommend you consult a tax professional.
When should an estate elect portability?
A decedent’s estate is required to file Form 706 when the gross estate plus adjusted taxable lifetime gifts (over the annual exclusion amount) exceed the applicable exemption amount.
However, where the surviving spouse’s estate is not large enough to benefit from portability right now, the decedent’s estate may still want to file a portability election just to be safe. The surviving spouse could receive an inheritance, increase the value of their assets, or remarry a wealthy individual – any of which could bring the surviving spouse’s estate above the estate tax exemption amount.
There is also the possibility that the federal estate tax exemption will drop in the future. (The current individual exemption will sunset at the end of 2025 unless Congress extends it.)
Maryland Estate Taxes
Maryland is one of the only states that imposes a state estate tax on the transfer of the Maryland estate of each decedent who at the time of death was either a Maryland resident or a non-resident of Maryland who has an interest in real property or tangible personal property with a taxable situs in Maryland. The Maryland estate tax exemption (also referred to as the Maryland estate tax exclusion) is $5 million for individuals. Like the federal exemption, the Maryland exemption is portable between spouses, meaning that a married couple can protect up to $10 million when both spouses die. However, unlike the federal exemption, it is not indexed for inflation. The Maryland estate tax rate is 16%.
The bottom line is that portability can dramatically impact estate tax liability and should be considered after a spouse’s death.
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