Estate Tax Planning: What is Portability?

For high net worth individuals and married couples, estate tax planning is an important part of the overall estate planning process. As explained by the Internal Revenue Service (IRS), an estate tax is levied on a person’s right to transfer money, property, and assets upon their death. That being, most people in North Carolina do not need to worry about the estate tax.

In 2021, the estate tax exemption is $11.7 million per individual. An estate is only taxed when its value exceeds the available exemption. Further, a legal concept called ‘portability’ can help married couples minimize their estate tax exposure. Here, our North Carolina estate planning lawyers explain the most important things you should know about portability, tax planning, and your estate.

In 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (TRUIRJCA) into law. Among a wide range of other things, the federal legislation created the concept of ‘portability’ in estate tax law. The basic principles of portability are relatively straightforward:

• When someone passes away, they have the right to elect to transfer any remaining unused portion of their estate tax exemption to their surviving spouse.

The transfer that the surviving spouse receives is known as the Deceased Spousal Unused Election Amount (DSUE). The surviving spouse can then use that additional amount to offset potential estate tax liability in the future. To be clear, federal portability rules only apply between spouses. You cannot elect to transfer your unused estate tax exemption to any other party.

As noted previously, the concept of estate tax portability is simply not an issue for most families in our country. This is because only a small percentage of people in North Carolina need to worry about federal estate taxes. Still, portability can make a dramatic difference in some cases. Here is an example that demonstrates the implications.

Imagine that a married couple in Charlotte, North Carolina has $20 million in total assets. In 2021, the husband passes away. As all of his property is held jointly by his wife, he used none of estate tax exemption. Through a portability election, he could transfer his estate tax exemption—$11.7 million in 2021—to his wife.

With her personal estate tax exemption and the DUSE amount received from her husband, her total exemption would rise to $22.4 million. Without portability, the man’s estate tax exemption would essentially go to waste. He would use virtually none of his personal exemption and his wife would still be limited to her individual $11.7 million. For this hypothetical couple, portability allows for major estate tax savings.

If you are part of a high net worth married couple and you have potential estate tax exposure, you may believe that the IRS will simply handle all of the tax matters for you and tell you how much you owe. Unfortunately, when it comes to portability, that is not the case. The IRS will not make the tax determinations that are in your best financial interests. If you do not actively elect to use portability, you will lose your opportunity to do so.

A portability election is done through IRS Form 706. This form should be filed by the executor of an estate. Under federal rules, the portability election form should generally be submitted within nine months of the passing of the person who is transferring their unused estate tax exemption to a spouse. If the IRS never receives Form 706, a married couple could lose out on their portability rights—thereby exposing themselves to unnecessary estate tax liability.

Do not wait to get started with estate tax planning issues. The earlier you and your family get started, the better position you will be in to protect your financial interests. As the estate tax exemption is scheduled to go down in 2025—and may decrease even sooner than that—there are steps you can take right now to help minimize your future tax burden.

At Arnold & Smith, PLLC, our North Carolina estate planning lawyer provides passionate, detailed-focused representation to clients and their families. If you have any questions about portability and estate tax planning, we are available to help. Contact us now for a confidential, no commitment evaluation of your case. With an office in Charlotte, Monroe, and Mooresville, our estate planning attorneys serve communities throughout the entire region, including in Mecklenburg County, Iredell County, Union County, and Carabus County.