The Pitfalls of Portability

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This year and next, a decedent can transfer his or her Personal Federal Estate Tax Exemption to his or her spouse.  This power to transfer, often referred to “spousal portability,” allows couples to protect a significantly larger chunk of their estates from Federal Estate Tax liability.

Although there is no guarantee that spousal portability is here to stay – it is currently scheduled to disappear at the end of 2012 – preserving spousal portability may turn out to be politically tenable.  For instance, President Obama’s February budget proposal would reduce the Personal Federal Estate Tax Exemption from $5 million to $3.5 million, but it would preserve spousal portability.  This proposed tax shelter, of $7 million, would still allow many couples to pass along their assets tax-free.  But, whether or not spousal portability will be available after 2012, couples should keep in mind that portability is not an automatic solution.

For instance, Spousal portability is only available couples the Federal Government considers to be married.  Thus, in California, spousal portability is not available to unmarried couples who are living together, no matter whether they have children or how long they’ve been together.  In addition, under DOMA, spousal portability is not available to the approximately 18,000 same-sex couples married in California or whose marriages are recognized by the State.  Spousal portability also does not apply to the 58,000 couples in California who are registered as domestic partners.

Couples who are eligible to use spousal portability should be cognizant of the fact that they must affirmatively choose portability in order to be able to use it.  The deceased spouse’s personal estate tax exemption can be transferred only if his or her executor elects to make that transfer.  To make this election, the executor must file a Federal Estate Tax return for the deceased spouse, even though he or she does not owe any estate taxes.  And the return must be submitted to the IRS within nine months of the death of the first spouse (although a six month extension is sometimes available).  If the executor does not file the return or misses the deadline, then portability disappears.

Another, more complicated aspect of spousal portability comes into play if the surviving spouse remarries.  Upon remarriage, the surviving spouse does not automatically lose the estate tax exemption from his or her first spouse.  But a surviving spouse gets keep only the exemption from the most recent spouse to die, regardless of the size of that exemption.  For example, lets say that Frank dies, leaving his $5 million exemption and his $10 million house to his wife, Samantha.  Their plan is that Samantha will eventually bequeath the house to their children and that, using both of their exemptions, no estate tax will be owed on the house.  Then, Samantha marries Neville, who has already used up all of his exemption by giving $5 million to his children.  If Samantha outlives Neville, she loses the $5 million exemption from Frank.  In that situation, Samantha’s estate would owe around $1.75 million in estate taxes on the value of the house and her executor would have to either sell the house or find another way to pay the taxes, before the remainder of Samantha’s estate can be transferred to her children.

The take-home lesson here is that spousal portability is a great estate planning tool for some couples, but it does take some thought and effort.  For more information about using spousal portability or to create an estate plan incorporating spousal portability, contact or see

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