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Taking advantage of estate tax portability

Taking advantage of estate tax portability

| Aug 26, 2020 | Estate Planning

While the estate planning process may seem complex to many people in Jackson, most might also assume that there are some simple general guidelines governing it. These likely include the need to be specific in one’s administration plans, the importance of naming an executor, and the need to pay taxes on the estate’s assets.

Yet concerning that final assumption, that may not necessarily be the case. Per the Department of the Treasury for the state of New Jersey, while the state did impose an estate tax in previous years, that liability officially ended in 2018. Thus, the only potential tax liability one needs to account for in their estate planning comes from the federal level.

Understanding the federal estate tax threshold

With careful planning, one may even be able to limit (or avoid) that tax liability. A federal estate tax exemption exists which allows any estate whose total taxable value is below the threshold amount ($11.58 million for 2020) to avoid being subject to taxes. Married couples can extend that exemption amount even further through a process known as portability.

Combining the portability benefit with the unlimited marital deduction

Estate tax portability allows one to claim the unused portion of their deceased spouse’s exemption. One can preserve that entire amount by simply leaving all of their assets to their spouse (which would then pass tax-free thanks to the unlimited marital deduction). According to the Internal Revenue Service, the surviving spouse can then file an estate tax return within nine months of their partner’s death electing portability (and effectively extending their exemption to $23.16 million).

One should remember, however, that portability is not automatic. One must file the return or risk losing the benefit. Even worse, if one’s spouse fails to elect portability, leaving them all their assets could push their individual estate’s value above the threshold amount.

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