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Estate Tax Changes in 2013 – “Portability” Becomes Permanent

February 20th, 2017

The “fiscal cliff” crisis of Christmas of 2012 culminated in the American Taxpayer Relief Act of 2012.  The Act made permanent the “portability” law contained in a previous law passed in 2010.

Portability allows a surviving spouse to claim the unused estate tax credit of a predeceased spouse.  The “estate tax credit” or “estate tax exemption” is the amount that a person can give away during lifetime or at death without paying federal estate taxes.  Prior to 2010 a surviving spouse could not claim their deceased spouse’s unused exemption.  So, for example, if a husband died in 2003 (when the credit was $1 million) and his portion of the married couple’s estate was $700,000, he would have used only $700,000 of his available $1 million credit, and left $300,000 of his available credit unused.  His wife could not, at her death, claim the $300,000 her husband had “left on the table.”  If her portion of the married couple’s estate was also $700,000 when her husband died, and it appreciated to $1.2 million at her death, she would only be able to apply the $1 million credit to her $1.2 million dollar estate, leaving $200,000 subject to tax at a rate of 49%, resulting in a federal estate tax of $98,000.

Portability allows the surviving spouse to claim her husband’s unused estate tax credit.  Using the previous example, if the wife filed an estate tax return (Form 706) at her husband’s death and claimed his unused exemption (called the Deceased Spouses Unused Exemption Amount or “DSUEA”), she would die with a $1.3 million credit and avoid all estate taxes.

The Act of 2012 raised the estate tax credit to $5 million per person, adjusted for inflation, which results in an exemption of $5.25 million in 2013.  Couples with combined estates that could approach $5 million should carefully consider filing an estate tax return at the first spouse’s death to claim the deceased spouse’s unused exception amount.

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