How Does “Portability” Work?

Coral Gables estate planning attorneys

For many people, an important estate planning goal is tax avoidance. After all, who wants to lose part of their estate to federal gift and estate taxes? To avoid that, you need to understand how the tax works and what tools and strategies are available to help reduce your estate’s tax obligation. The Coral Gables estate planning attorneys at Stivers Law explain what portability is and how it works in 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 $1 million in value. Your estate, at the time of your death, was valued at an additional $6 million. The combined total of $7 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 $7 million estate would owe $2.8 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 2017 levels, adjusted for inflation. For 2022, the individual lifetime exemption amount is $12.06 million which will increase to $12.92 million in 2023.

What Is Portability?

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 2022 leaving behind an estate valued at $7 million, your spouse would use $7 million of his/her $12.06 million exemption. The remaining $5.06 million would “port” over to you. You would then have a $17.12 million exemption (your $12.06 million plus your spouse’s remaining $5.06 million = $17.12 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 Coral Gables Estate Planning Attorneys

For more information, please join us for an upcoming FREE webinar. If you have additional questions or concerns about how portability works or how it fits into your estate plan, contact the experienced Coral Gables estate planning attorneys at Stivers Law by calling (305) 456-3255 to schedule an appointment.

Author Bio

Justin Stivers is the founder and managing attorney of Stivers Law, an estate planning firm specializing in wills, probate, trust administration, and financial risk management services. Justin’s approach goes beyond just creating legal documents. From aligning investments with estate plans to ensuring comprehensive insurance coverage, he safeguards a client’s legacy from unforeseen circumstances. His commitment extends beyond individual transactions, fostering lifelong partnerships to provide ongoing support and guidance.

With an impressive track record, Justin is licensed by the Florida and the Tennessee State Bars. His professional portfolio boasts Series 65 registration as a Registered Investment Advisor, the Wealth Management Specialist™ designation, and a 2-15 License for Health, Life, and Annuities. His dedication to excellence has earned him positions like Board Member of the Estate Planning Council of Greater Miami, Business Eagle Member of the Florida Justice Association, and active membership in esteemed organizations like the American Academy of Estate Planning Attorneys.

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