Portability: It’s a Great Thing

Posted by Margo McDonnell | Wed, Aug 08, 2012

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When it comes to taxes, the term “portability” does not sound like a good thing.  As part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (The “ACT”), portability is a GREAT thing!  It is the concept in which a surviving spouse is allowed to use his/her deceased spouse’s unused estate tax exclusion.

Portability doubles the amount a married couple may pass to their heirs free of estate taxes. The
2010 Act set the exclusion at $5,000,000 and it is indexed for inflation so in 2012, the exclusion is $5,120,000. The Act provides portability between spouses for estates where a spouse died in 2011 or 2012 and the second spouse dies after 2010 and before 2013. The unused portion of the last deceased spouse’s estate tax exemption is available to the surviving spouse who can utilize the unused portion for both gift tax and estate tax purposes. 

To preserve the unused estate tax exemption amount for the surviving spouse, an election must be made on the estate tax return. The portability benefit is limited to the unused estate tax exemption of the last deceased spouse of the surviving spouse to avoid “serial marriages.”

The current rules were scheduled to sunset at the end of 2012 but IRS recently issued temporary regulations extending the ability to use this portability until June 15, 2015. Additionally, any anticipated extensions of the reduced estate tax rates are expected to include portability.

Following are a few updates to the portability clause within the temporary regulations:

  • The portability election is considered completed by the filing of the estate tax return for the decedent’s estate.
  • The executor must include a computation of the Deceased Spousal Unused Exclusion (DSUE) amount on the estate tax return.
  • A portability election is irrevocable.

There has also been significant ease of filing requirements for estate that fall below the exclusion amount. 

This is just a brief overview of the ability to port the gift and estate tax exclusion but hopefully, you see how beneficial it is, especially for taxpayers who have deferred significant gains through section 1031 exchanges. Upon the death of a taxpayer, heirs typically inherit the assets with a step up in basis - meaning the fair market value at the time of death. For those who have completed 1031 exchanges and deferred gain, upon death, the deferred gain is forgiven. Investors have long worried that this could trigger more estate taxes but with the estate tax exclusion of $5,120,000 and portability between spouses, many no longer need to worry. 

Your tax advisor can provide more detail on portability and help you determine how it and 1031 exchanges can help with your estate planning. The 1031 CORP. Exchange Team is always available to help with your 1031 exchange needs.

Topics: portability, deferred gain forgiven, 1031 Exchange

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