The first issue regarding portability is what does portability do? The answer is that portability allows the first spouse to die to transfer his/her unused estate tax applicable exclusion amount to the surviving spouse, who can then use it for his/her gift or estate tax purposes.
The American Tax Relief Act of 2012 (ATRA) brought a lot to the table in regards to estate planning. One planning topic of interest brought on by ATRA is the permanence of “portability.”
While the concept of “portability” is not entirely new, it is a fairly important tax concept for all married couples.
In fact, a recent Forbes article titled “Estate Tax Portability - New Paradigm For Estate Planning” is a primer of sorts for couples still unfamiliar with the concept now become law. Practically speaking, with the advent of “portability,” most married persons do not need to worry about maximizing the estate/gift tax exemption of each spouse. Formerly, couples had to craft special trusts and other devices to ensure the opportunity to shelter their combined estate/gift tax exemption amount.
Under ATRA the estate/gift tax exemption amount for each spouse is “portable” between spouses. Consequently, not only can the surviving spouse inherit all of the couple’s assets, but can inherit the exemption amount attributed to the deceased spouse. This “portability” benefit is not automatic and what appears simple can become complex.
The surviving spouse is required to file the correct tax forms (i.e. IRS Form 706) to claim the unused estate/gift tax exemption of the deceased spouse. Fail to do the paperwork and you fail to get the benefit of portability.
Reference: Forbes (July 20, 2013) “Estate Tax Portability - New Paradigm For Estate Planning”