If you have a moderate to large estate, one of your estate planning goals should be to avoid losing part of that estate to federal gift and estate taxes. To do that, you need to understand how the tax works and what tools and strategies are available to help reduce your estate’s tax obligation. Toward that end, a Mesa estate planning attorney at Morris Hall PLLC explains the concept of portability and how it may fit into your estate plan.
Federal Gift and Estate Tax Basics
The federal gift and estate tax is effectively a tax on the transfer of wealth that is collected from the estate of a taxpayer during the probate of his/her estate. Every taxpayer is potentially subject to federal gift and estate taxes. Moreover, the tax applies to all qualifying gifts (almost all gifts are considered “qualifying” gifts) made during a taxpayer’s lifetime as well as all estate assets owned by the taxpayer at the time of death. To illustrate how the tax works, imagine you made gifts during your lifetime totaling $2 million in value. Your estate, at the time of your death, was valued at an additional $8 million. The combined total of $10 million would be subject to federal gift and estate taxes. Historically, the federal gift and estate tax rate was subject to change – and did change on a regular basis. The American Taxpayer Relief Act of 2012 (ATRA), however, permanently set the rate at 40 percent. Without any deductions or adjustments, that $10 million estate would owe $4 million in federal gift and estate taxes to Uncle Sam.
The Lifetime Exemption
The good news is that each taxpayer has always been entitled to make use of the lifetime exemption prior to calculating the amount of gift and estate taxes owed to Uncle Sam. Although the exemption amount also fluctuated in the past, ATRA set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. In 2018, however, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years thereafter. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. For 2023, the individual lifetime exemption amount is $12.92 million.
How Does Portability Fit into the Picture?
ATRA also made the concept of portability permanent. Portability refers to a surviving spouse’s ability to use any unused portion of a deceased spouse’s lifetime exemption. Using our example above as your spouse, if he/she were to pass away in 2023 leaving behind an estate valued at $10 million, your spouse would use $10 million of his/her $12.92 million exemption. The remaining $2.92 million would “port” over to you. You would then have a $15.84 million exemption (your $12.92 million plus your spouse’s $2.92 million = $15.84 million) that can be used when your estate is probated. The increased exemption amount often makes a huge difference if the first spouse to die gifts all his/her assets to the surviving spouse. Keep in mind that those figures only apply right now when the increased lifetime exemption amount is in place. Portability will remain a powerful estate planning tool even after the lifetime exemption amount is decreased.
Contact a Mesa Estate Planning Attorney
For more information, please join us for an upcoming FREE live webinar. If you have additional questions or concerns about how portability fits into your estate plan, contact an experienced Mesa estate planning attorney at Morris Hall PLLC by calling 888-222-1328 to schedule your appointment today.
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