PortabilityPurpose: To minimize or eliminate federal estate taxes for a married couple.
How does it work? Starting Jan. 1, 2018, federal law gives each taxpayer a $11.2 million exclusion from the federal estate tax. If someone dies and their total estate, including gifts made during their lifetime, does not exceed $11.2 million, their estate probably does not owe federal estate taxes.
In the past, however, if the first spouse to die gave all of his or her estate to the surviving spouse, the exclusion for the first spouse to die was lost. Married couples used A-B trusts, also called bypass trusts or exemption trusts, to avoid losing the exclusion.
Portability allows the surviving spouse to use the remaining exclusion that the first spouse to die did not use. If the first spouse to die gave all of his or her estate to the surviving spouse, the surviving spouse will wind up with a maximum $20 million exclusion. (Portability is not indexed to inflation.)
What are the problems with portability? The surviving spouse must elect to use portability by filing an estate tax return for the estate of the first spouse to die. The estate tax return must include the election for portability, which is probably accomplished by simply checking a box. However, failing to file the return will cancel portability for the first spouse to die. Estate tax returns are complicated and CPAs will charge thousands of dollars to prepare them.
Another problem is that portability applies only to estates of those who died after Jan. 1, 2011. Estates of decedents who died before that date are subject to the old law, which doesn't allow portability.
Also, portability does not apply to generation skipping transfers.