What is portability? Simply put, it means that now spouses can pass their estate and gift tax exemption to each other when the first one passes. In 2014, the federal estate tax exemption is $5,340,000. That’s a lot tax-free exemption to pass to your spouse.

So what exactly does portability mean when referring to estate planning in Colorado? To answer that question we begin with the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRUIRJCA) and the American Tax Relief Act of 2013 (ATRA). Mouth fulls, I know, but hear me out. The former created portability and the ladder makes it pretty much permanent. This is good news folks!

Need An Example?

Let’s use this in an example to make it easier to understand. Let’s say husband H and wife W have $7,000,000 to their names. Unfortunately, H dies and does not create any trusts that use his federal estate exemption. Fortunately, due to the unlimited marital deduction, all of the assets pass tax free to W. Now let’s look at what happens when W dies. She can use her 5,340,000 federal estate exemption AND, with the newer laws, can still utilize H’s unused federal estate tax exemption of $5,340,000. This means that since the 10,680,000 exemption that W now has is greater than her $7,000,000 estate, she pays ZERO dollars in estate tax. Woohoo,  nice work!

Without portability, W would have lost H’s unused exemption and ended up paying estate taxes on $1,660,000 (7,000,000 – 5,340,000). You must make sure to make an election shortly after the first spouse passes or you will lose out on this huge tax-savings benefit.

Give Us A Call

Questions? Wondering if portability or credit shelter trusts are better for you? Contact Althaus Law for more info.