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Estate tax portability explained 

On Behalf of | Nov 1, 2021 | Estate Planning - Estate Administration & Probate

You may have heard the term “portability” thrown around in the past few years in consultation with your attorney or tax preparer, but do you really understand what it means?  In this post, we will take the time to explain portability and why it could be an important tax planning tool for you.

Portability, in the simplest of terms, is the “ability” of a surviving spouse to “port” their deceased spouse’s unused estate tax exemption amount (“DSUEA”) remaining at the time of death. As explained in our last blog post, the amount each individual can exempt from the federal estate and gift tax for 2021 is $11.7 million and the amount each individual can exempt from the Maryland estate tax for 2021 is $5 million. The effect of portability is that a married couple has a combined $23.4 million exemption from the federal estate and gift tax and a combined $10 million exemption from the Maryland estate tax for 2021.

In order to elect portability, a surviving spouse must file an estate tax return (Form 706 for the federal estate tax and Form MET-1 for the Maryland estate tax) within nine months of their spouse’s date of death. However, there is a grace period to file the estate tax returns of up two years from date of death if a deceased spouse’s total taxable estate is under the available exemption amounts in the year of their death.

On the federal level, portability first became available to married couples under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and was later made permanent when the American Taxpayer Relief Act of 2012 (ATRA) was signed into law by President Obama on January 2, 2013. On the state level, Maryland enacted legislation allowing portability for the state estate tax exemption in 2018, at the same time Maryland increased its estate tax exemption amount to $5 million per person.

Maryland’s law also made portability retroactive for anyone whose spouse died between 2011 (when federal portability was first allowed) and 2018, provided that the federal portability election was made within nine months of the date of death of their deceased spouse.

From a practical standpoint, portability was a game changer for estate tax planning. Prior to portability, in order to take advantage of a DSUEA, tax planning trusts (commonly known as Bypass Trusts, B Trusts, Credit Shelter Trusts or Family Trusts) had to be incorporated into most married couple’s estate plans. Typically, this was done with the use of formula-funded tax planning trusts, whereby the maximum amount that could pass estate tax free upon the death of the first spouse would be held in the tax planning trust for surviving spouse’s benefit instead of being distributed outright.

With the introduction of portability, now all a surviving spouse has to do to preserve the DSUEA is file an estate tax return within nine months (or two years in certain situations) from their spouse’s date of death.  The effect is that wills and revocable trusts for most married couples have become much more simplified in recent years.

If you previously set up a complex formula-funded (aka mandatory) tax planning trust as part of your estate plan before portability, contact us to schedule a complimentary 15-minute phone call and review of your existing documents to discuss potential changes necessary to make your overall estate plan more flexible and consistent with the current tax planning laws.