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People always say there are two guarantees in life - death and taxes. While that may be true, you can escape a lot of tax when you pass away. The "portability" rules provide for the transfer of a deceased spouse's unused estate tax exemption (deceased spousal unused exclusion or "DSUE"). In 2015 the exemption amount is $5,430,000; therefore if the decedent's taxable estate is not more than the exemption amount, the DSUE can be used by the surviving spouse with respect to both gift taxes and estate taxes.

Portability has been around since 2012, however it has taken some time to get clarity from the IRS on when and how to use portability. In order to be eligible for the portability you must file a Form 706 estate tax return even if not otherwise required. This must be filed within nine months after the death of a spouse to secure portability. A six month extension (Form 4768) is available, but must be filed in the first nine months. If a 706 return is not filed, then portability is gone.

The bottom line is how much can portability actually save you? The answer is a lot. When considering the tax rates that apply to estates it is important to look at this exemption. Even though the IRS lists rates as low as 18 percent it can quickly increase to 40 percent on estates that are greater than $1 million of taxable value. The maximum savings from the estate tax exemption in 2015 is slightly over $2.1 million. For example, assume a husband has $5 million of assets that pass under his will and trust with another $3 million of joint property with his wife. If he were to die leaving all his estate assets to his surviving spouse, there would be no tax due on the husband's estate, because the assets would qualify for the marital deduction. Now assume she dies, then all the assets would be subject to her estate, totaling $8 million. If they did not file a 706 at husband's death, then her estate would have a tax liability of around $1 million. If they did file a 706 at his death, he would not have used any of the exclusion amount and his exemption would be passed onto her. When the surviving spouse passes away she could use her $5.43 million exemption, as well as his exemption and therefore, her estate would not have to pay any estate tax as well.

It is important to consider filing a 706 return when the first spouse dies to preserve their exemption for the second death. You should discuss with your tax advisor and estate attorney to ensure proper planning.

For more information on portability and estate planning, please contact your local UHY professional.