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In addition, I am Chair and former Vice-Chair of the Fiduciary Income Tax Committee of the American Bar Association Section of Taxation. Assume the DSUE amount from George’s estate is $4 million. Estate tax blocker corporation Since shares of a non-US corporation do not have a situs in the United States for estate tax purposes, a properly structured non-US corporation can hold US situs assets and serve as a blocker from US estate tax (for further details please see "Tax planning for US equities owned in a non-US trust structure") . 2001(b)(1) on the estate of that deceased spouse. Indexed exemption of survivor (2%), = $13,653,000 …………………………… Taxable estate at 2nd death in 2033 40% ………………………………………. Or would it? $350,000 – $200,000 = $150,000 in Tax Benefit. The American Taxpayer Relief Act of 2012 (ATRA) permanently enacted the concept of “portability” of any unused estate tax exemption which may now be carried over the first death to the second death of a married couple. Net inheritance from Marital Portion (A) in 2033 + $11,000,000 ………………………………. This is especially true if the survivor has 10 or more years of life expectancy after the death of the first spouse. In a Q-TIP trust the second spouse has only a limited income interest in the trust with the trust principal preserved for children from the first marriage. The husband dies with $3 million of assets in his estate, which he is leaving to the couple’s children. Only Hawaii 2  and Maryland 3  offer portability of its state estate tax exemption at the state level as of 2020. In 2002, the exemption was increased to $1 million. In these cases, the survivor may NOT want to elect portability so that the deceased’s estate tax exemption can be used at the first death: • At what age did the first spouse die? For information on electing portability of the decedent's DSUE amount, including how to … George and Barbara are married. The growth of the estate will not avoid the 40% federal estate tax rate at the surviving spouse’s death if “portability” was elected. The need for splitting the estate into “marital” and “credit shelter” portions at the first death would be eliminated. Surviving spouse’s basic applicable exclusion amount. The first issue regarding portability is what does portability do? W remarries after H's death. Since in 2015 the federal estate tax exemption is $5.43 million per person (the exemption changes every year since it is indexed for inflation), this means that a married couple can potentially pass on $10.68 million to their heirs free from federal estate taxes. If the new homestead is of equal or greater value than the old homestead, the homeowner may port up to $500,000 of capped value to their new homestead. We can generally conclude that if the estate is expected to grow at a modest rate between the first and second death of a married couple, that it may make sense NOT to elect “portability” at the first death. What can we conclude from the hypothetical electing “portability” versus not electing “portability” example above? © 2020 Forbes Media LLC. Don’t complete B and C. If no estate tax return was […] With a future inflation-adjusted estate tax exemption of about $7M, Mary will only be exposed to estate taxes on $14.5M of assets, instead of $19.75M from the preceding example. However, federal estate taxes are a concern. Here’s an example: Let’s say your total estate is worth $5 million. Prior to the enactment of ATRA, if the estate tax exemption was not used on the first death, it was not available at the second death. Portability of the estate tax exemption means that if one spouse dies and does not make full use of his or her $5,000,000 (in 2011, or $5,120,000 in 2012, $5,250,000 in 2013, $5,340,000 in 2014, and $5,430,000 in 2015) federal estate tax exemption, then the surviving spouse can make an election to pick up the unused exemption and add it to the surviving spouse’s own exemption. In this regard, the DSUE equals the lesser of the following two items: So, this post discusses what portability is and what it does. However, if the husband’s estate files an estate tax return and makes the election to transfer the DSUE, the wife’s exclusion is increased by $8 million. This may lower the tax assessment and, consequently, the taxes on the new property. To allow a decedent's surviving spouse to take into account that decedent's deceased spousal unused exclusion (DSUE) amount, the executor of the decedent's estate must elect portability of the DSUE amount on a timely filed Form 706, “United States Estate (and Generation-Skipping Transfer) Tax Return” (estate tax return). Federal Estate Tax. EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, Michigan Economic Development Corporation With Forbes Insights. Let’s take a look at a hypothetical case example where we compare a electing “portability” of the estate tax exemption versus NOT electing “portability” and using a Credit Shelter / By-Pass trust instead at the first death. One of the most important issues is is how to elect portability, which will be the subject of our  next post. Portability refers to the ability of a surviving spouse, to make use of a deceased spouse’s unused estate tax exclusion amount (DSUE amount). However, if the estate tax return includes an election to allow portability of the DSUE amount to the surviving spouse, then the time limit on … Because the $3 million is less than the $11 million, no federal estate taxes are actually due and no return is required. The credit shelter portion (B) was typically allocated an amount of property equal to the estate tax exemption then available (ranging from $600,000 to the current $5,430,000) with the remainder of the estate allocated to the marital portion (A) via the unlimited marital deduction. Since the Economic Recovery Tax Act of 1981 (ERTA), the common planning technique to assure that this exemption was not “wasted” at the first death was the Marital-Credit Shelter Trust, commonly known as the A-B Marital-Family Trust or A-B Marital / By-Pass Trust. Estate tax rate = $5,461,000 …………………………….. Federal estate tax at 2nd death in 2033, • $15,952,000 ………………………………Net inheritance from A portion in 2033, • $5,430,000 ……………………………… Credit shelter (B) portion in 2015 (Growth at 4% for 18 Years), • $11,000,000 Value of Credit Shelter Portion in 2033 (Not included in estate of survivor), • $11,000,000 ……………………………. I. After 2012, one important question for estate planning is whether or not “portability” should be elected at the first death. Estate taxes attributable to the remainder of the estate or to an estate without a qualified closely-held business cannot be deferred. Net inheritance from B portion in 2033 $15,952,000 …………………………………. Historically speaking, estate tax exemptions and estate tax portability have undergone multiple changes since the year 2000 when the exemption amount hovered at $675,000. In 2013, when the basic applicable exclusion amount equals $5.25 million, Barbara dies. Note. The Federal Estate Tax Exemption The federal estate tax exemption is indexed for inflation, so it increases periodically, usually yearly. That is, the IRS has years from the initial three filing deadline to challenge the estate tax return. Part 6 of Form 706 is where you elect Portability of Deceased Spousal Unused Exclusion (DSUE) for the estate. -Federal Estate Tax Return filed for portability. This list details what do for each section of Part 6: Section A, Opting Out of Portability: Check the box to elect out of portability. https://www.nolo.com/legal-encyclopedia/washington-estate-tax.html By electing section 6166, you may be required to provide security for estate tax deferred under section 6166 and interest in the form of a surety bond or a section 6324A lien. You may opt-out by. • Splitting the estate into a marital-credit shelter plan at the first death can protect the credit shelter portion ($5.43 million) from subsequent marriages by the survivor. Based on these assumptions, does it make sense to elect “portability” if Mr. Johnson died unexpectedly today and Mrs. Johnson died at her life expectancy, which is age 85 (18 years)? I am a prolific author and frequent speaker on tax and estate planning issues, co-authoring numerous books including Asset Protection Strategies: Tax and Legal Aspects and Valuation of Closely HeldBusinesses: Tax and Legal Aspects. Any estate that is filing an estate tax return only to elect portability and did not file timely or within the extension provided in Rev. On January 1, 2013, Congress passed the American Tax Relief Act of 2012 (“ATRA”), which President Obama signed on January 2, 2013. Change 1: Cut the tax exemption in half. Portability of the estate tax exemption The American Tax Relief Act of 2012 (ATRA) signed into law on January 3, 2013, by President Obama extended the opportunities for “portability” of a decedent’s unused estate tax exemption. The growth on the B portion “by-pass” amount will not be included in the estate of the survivor. The end result – Mary avoided future estate taxes not on David’s assets (which were sheltered anyway), but on the growth on David’s assets after he passed away. George dies in 2011 and his estate makes the portability election. PORTABILITY EXAMPLE 2. Assume the DSUE amount from George’s estate is $4 million. George dies in 2011 and his estate makes the portability election. After all, electing “portability” could mean that a surviving spouse could have double the estate tax exemption at the second death (currently $5,430,000 x 2 = $10,860,000). However, portability raises several issues. The hypothetical electing “ portability ” should be elected at the first death would be eliminated our! '' of a spouse 's estate tax due for an estate tax exemption is indexed for inflation 67 years and. 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