Portability

Lesson

Portability is a tax provision that allows a surviving spouse to apply the unused portion of the deceased spouse's estate tax exemption to their estate. This can help reduce the tax burden on the surviving spouse's estate and provide more wealth to their beneficiaries.

Practice Question #1

What is the primary purpose of portability in estate planning?

A) To allow a surviving spouse to use the deceased spouse's unused estate tax exemption

B) To transfer assets to a charity tax-free

C) To provide income to the grantor of a trust

D) To hold life insurance policies outside of an estate

Select an option above to see an explanation here.

A) Portability allows a surviving spouse to use the deceased spouse's unused estate tax exemption, reducing the tax burden on their estate. B) Transferring assets to a charity tax-free is a feature of a charitable remainder trust. C) Providing income to the grantor of a trust is a feature of a grantor-retained annuity trust. D) Holding life insurance policies outside of an estate is a feature of an irrevocable life insurance trust.

Terms

Portability:: A tax provision allowing a surviving spouse to use the unused portion of the deceased spouse's estate tax exemption.

Practice Question #2

Which tax credit combines the estate tax exemption and the gift tax exemption?

A) Unified credit

B) Marital deduction

C) Generation-skipping transfer tax credit

D) Charitable deduction

Select an option above to see an explanation here.

A) The unified credit combines the estate and gift tax exemptions. B) The marital deduction allows a spouse to transfer assets to the surviving spouse without incurring estate or gift taxes. C) The generation-skipping transfer tax credit applies to transfers made to beneficiaries more than one generation younger than the donor. D) The charitable deduction applies to transfers made to qualified charities.

Historical Example

In 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act introduced the concept of portability, allowing surviving spouses to utilize the unused portion of their deceased spouse's estate tax exemption.

Practice Question #3

What is the primary difference between portability and the marital deduction?

A) Portability applies to the deceased spouse's unused estate tax exemption, while the marital deduction applies to transfers between spouses.

B) Portability applies to transfers between spouses, while the marital deduction applies to the deceased spouse's unused estate tax exemption.

C) Portability applies to gift taxes, while the marital deduction applies to estate taxes.

D) Portability applies to estate taxes, while the marital deduction applies to gift taxes.

Select an option above to see an explanation here.

A) Portability allows a surviving spouse to use the deceased spouse's unused estate tax exemption. In contrast, the marital deduction allows a spouse to transfer unlimited assets to the surviving spouse without incurring estate or gift taxes. B) This option reverses the definitions of portability and marital deduction. C) Both portability and the marital deduction primarily relate to estate taxes, not gift taxes. D) Both portability and the marital deduction primarily relate to estate taxes, not gift taxes.

Real-World Example

A husband passes away with an estate worth $3 million, and his estate tax exemption is $5 million. The unused portion of his exemption is $2 million. His wife, the surviving spouse, has an estate worth $7 million. With portability, she can apply the $2 million unused exemption from her husband's estate to her own, reducing her taxable estate to $5 million and potentially saving her beneficiaries from significant estate taxes.