The American Taxpayer Relief Act (ATRA) made “portability” permanent – well, as permanent as anything can be while Congress is still in session.
Under the new law, the applicable exclusion amount for estate tax, gift tax and generation skipping tax is $5,000,000, indexed for inflation. This is the amount you can die with or the total amount you can gift during your lifetime without an estate tax or a gift tax. The indexed amount for 2013 is $5,250,000.
“Portability” allows you to capture or “port over” your deceased spouse’s unused exclusion (DSUE).
What is Portability
If your spouse dies in 2013, and his half of your community property estate is worth $525,000, then his remaining exclusion is $4,500,000 ($5,250,000 – $525,000). If after he dies, you file an estate tax return (Form 706) for his estate, and you make the “portability election,” you can capture his remaining exclusion amount.
If so, when you pass away, the amount you can die with before there will be an estate tax is your exclusion amount plus your deceased husband’s exclusion amount that you “ported over.” In our example, your total exclusion would be $5,250,000 (using the 2013 figure) plus $4,500,000, for a total of $9,750,000.
Portability is a great aspect of ATRA. Congress actually did a good thing with this. Instead of wasting the unused deceased spouse exclusion amount (DSUE), you can port it over and have it at the ready just in case your estate value grows.
Need to File 706 Estate Tax Return
You won’t automatically port over your deceased spouse’s exclusion. You have to timely file a Form 706 estate tax return for your deceased spouse to make the portability election. The same estate tax return can be used to make a QTIP election as discussed in my previous post.
By make both a portability election and a QTIP election on the estate tax return, you will be able to to reap the benefits of a bypass trust, including: 1) preserving the estate tax exclusion of your deceased spouse and 2) significantly protecting the trust assets from creditor claims and subsequent marriage divorce claims – but still preserve a step-up in basis and lower income tax rates for the trust income (see my previous post).