Maroney Law Blog

Tuesday, January 6, 2015

Increases in the Federal Estate Tax and Portability for 2015

The American Taxpayer Relief Act of 2012 brought significant changes to the federal estate tax system, including the concept of portability. In 2015, there will be a $5,430,000 federal estate tax exemption, increased from $5,340,000, and a top federal estate tax rate of 40%.

What is portability?

Portability is a concept that allows a deceased spouse’s unused estate and gift tax exemption to be used by the surviving spouse. In effect, this mechanism is intended to prevent families from having to pay costly gift and estate taxes that could have otherwise been avoided.

How does portability work?

Portability is best illustrated by understanding how the federal estate tax system would work without portability. For example, assume a hypothetical marriage between Spouse X and Spouse Y. Spouse X owns $6 million of assets and Spouse Y has $4 million. Spouse X passes away, leaving the entire $6 million to Spouse Y. Because passing the property to Spouse Y would qualify for the unlimited federal estate tax marital deduction, the deceased spouse, Spouse X, has effectively wasted his unused federal estate tax exemption. When Spouse Y passes with an estate worth $10 million, Spouse Y would only be allowed to exempt $5,340,000, assuming they pass away in 2014.  Thus, the remaining $4,660,000 would be subject to a 40% taxation, a significant portion of the estate.

If portability applied upon Spouse X’s death, the $5.34 million of unused estate tax exemption could have been passed to Spouse Y to use. Now, Spouse Y would be able to use her own $5.34 million of federal estate tax exemption, as well as the $5.34 million of federal estate tax exemption that passed from Spouse X, for a total federal estate tax exemption of $10.68 million. Since the estate is worth $10 million, Spouse Y can apply the entire $10.68 million federal estate tax exemption to insulate the entire estate from federal estate taxes. Thus, portability saves the heirs nearly $2 million in federal estate taxes.

For more information about estate planning techniques or how the federal estate and gift taxation laws are applicable to you and your loved ones, contact an experienced Trust and Estate attorney.  To set up a consultation with the attorneys at Maroney Associates, PLLC, please call us at 866-994-2025. 

Based in Melville and Garden City, New York, the attorneys at the Law Offices of Maroney Associates, PLLC assist clients throughout Nassau County, Suffolk County, Queens, and the cities of Mineola, Hempstead, New Hyde Park, Franklin Square, Williston Park, Queens Village, Melville, Huntington, Farmingdale, Patchogue and Uniondale, NY.

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