Estate Tax Portability
The federal estate tax taxes the transfer of a person’s property at death. However, most people never have to pay estate tax. This is because there is a significant exemption to estate taxation. This exemption can have an even greater impact for married couples because of portability, which essentially allows a spouse to inherit his or her deceased spouse’s unused exemption.
For 2015, the federal estate tax exemption amount is $5.43 million. This means that for the first $5.43 million of a decedent’s estate, no estate taxes are owed. For amounts over $5.43 million, an estate will have to pay up to 40% in taxes. There is an unlimited estate tax exemption for transfers to spouses. Thus, even if a decedent leaves a spouse $15 million, no estate taxes will be owed at the time of that transfer, and the amount will not use up the estate tax exemption.
The estate tax exemption amount is combined with the federal gift tax exemption. There is an annual exclusion for gifts of up to $14,000 per person per year. If larger gifts than that are made, the taxable portion will eat into the estate tax exemption, and tax will be owed once the exemption amount is used up. This is to prevent people from giving away their estates soon before death, in order to avoid estate taxes.
A married couple may give a tax-exempt joint gift of up to $28,000 per recipient per year. A married person may also give solo gifts of up to $28,000 per recipient per year if he or she files a 709 Gift Tax return and elect “gift-splitting.”
Generation-Skipping Transfer Tax
The estate tax exemption is also unified with the generation-skipping transfer (GST) tax exemption. The GST tax is levied on a gift from one generation to a younger generation at the grandchild level or younger, or to an unrelated person at least 37.5 years younger. It is meant to prevent people from transferring wealth to younger generations so as to skip one or more generations of estate tax. Taxable generation-skipping gifts (that are not covered by the annual gift tax exclusion) will be deducted from the estate tax exemption.
Portability means that a surviving spouse can inherit the unused portion of the deceased spouse’s estate tax exemption, if the deceased spouse does not use the whole exemption amount at his or her death. For example, a husband and wife each have $4 million. The husband dies and bequeaths his entire estate to his wife. Because of the unlimited marital exemption, he has not used any of his estate tax exemption. At her death, therefore, the wife can use his unused $5.43 million exemption amount, giving her a total $10.86 million exemption. She will thus likely not have to pay any estate tax at her death.
A spouse must elect portability by filing Form 706 with the estate tax return. Portability essentially means that a married couple has a $10.86 million estate tax exemption. This means that the vast majority of married couples will never have to pay estate taxes.
Since 2005, Florida has not had an estate tax, so there is no need to worry about exemptions or portability except in the area of federal estate tax.
Understanding estate taxes can be difficult, but it has significant consequences. An experienced attorney can help you to minimize the tax consequences of your estate. If you do not have an estate plan, please contact the Law Offices of Larry E. Bray in Boca Raton for an initial consultation.