attorney explaining the estate tax exemption to a couple

How Can the Portability of the Estate Tax Exemption Impact You?

Estate planning involves an overlap with many different types of law. For instance, tax law can be a prominent component of estate planning. While not all states have an estate tax, there is still the federal estate tax to consider. Without proper planning, more sizeable estates risk losing a significant amount of value to taxation. Fortunately, the federal estate tax is quite large and there is also the portability feature to consider.

How Can the Portability of the Estate Tax Exemption Impact You?

A few years ago, the Tax Cuts and Jobs Act (TCJA) doubled the federal estate tax exemption. This left the estate tax exemption at $11.18, but only for the years 2018 through 2025. Considering the recent change in administrations, however, this time frame may be shortened sooner rather than later. Additionally, the federal estate tax exemption is indexed for inflation. This means that it usually increases somewhat each year. For 2019, the federal exemption amount was $11.4 million. For 2020, it was $11.58 million. For the year of 2021, it currently sits at $11.7 million. This exemption amount is per individual. For married couples, it doubles.

If you are married, the portability of the estate tax could have a notable impact on you. In the past, much of estate planning was based around the fact that, if a person passed away, whatever estate tax exemption was unused by his or her estate was lost for good. This meant that estate planning attorneys focused much of their energy on trying to divide asset ownership as equally as possible between spouses, so they could both have as much coverage by their individual estate tax exemption for their respective estates.

On December 17, 2020, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (TRUIRJCA) into law. This prominent piece of legislation introduced the portability feature to the federal estate tax exemption for married couples. Now, with portability, whatever portion of the federal estate tax exemption that goes unused by a person’s estate passes to his or her surviving spouse and will be added to his or her own individual estate tax exemption when he or she passes away. 

The portability feature of the federal estate tax exemption is a great benefit to married couples looking to avoid taxation of their estates at the federal level. It also looks as if the portability feature is here to stay. On January 2, 2013, President Obama signed the American Taxpayer Relief Act (ATRA) into law. This piece of legislation provides that the portability of the federal estate tax exemption does not need to be renewed. It exists in perpetuity unless Congress takes active steps to get rid of it.

Estate Planning Attorneys

At OC Wills & Trusts, we want to create a strong estate plan for you and your loved ones that maximizes the value of your estate. This means having a thorough understanding of the relevant tax laws and your unique circumstances. Contact us today.