7 Big Estate Planning Mistakes: Losing The Portability Of A Spouse’s Unused Exemption


&l;p&g;&l;img class=&q;dam-image shutterstock size-large wp-image-1041315862&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/1041315862/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Shutterstock

This is the sixth installment of my seven-part series on estate planning mistakes. I list the others at the end of this article.

&l;strong&g;Mistake #6: Losing the portability of a spouse&a;rsquo;s unused exemption.&l;/strong&g;

Before the law was changed in 2010, a major part of the estate planning process for married couples was to equalize the value of assets in which each had legal title. Back then, each spouse had a separate lifetime estate and gift tax exemption, but the exemptions couldn&a;rsquo;t be shared. A married couple potentially could avoid estate taxes on a joint estate worth up to two individual exemptions, but they had to jump through some hoops.


The joint exemption wasn&a;rsquo;t automatic.

Suppose when the individual exemption was $3 million a couple had an estate of $7 million. Of that, $1 million was in the wife&a;rsquo;s name, and $6 million was in the husband&a;rsquo;s name. None of it was jointly held. If the wife died first, her lifetime exemption would shelter only $1 million of the joint estate. The widower would be left with a $3 million exemption to shelter a $6 million estate, assuming the wife left her $1 million to the children or a bypass trust.

Because the lifetime exemptions couldn&a;rsquo;t be shared between the spouses and the estate primarily was in the name of one spouse, about $3 million of this estate was subject to estate taxes.


Since 2010, the portability rule allows any unused lifetime estate and gift tax exemption of a deceased spouse to be transferred to the surviving spouse, ensuring it isn&a;rsquo;t lost. A married couple has a true joint exemption equal to two individual exemptions, and it doesn&a;rsquo;t matter how much of the estate is legally owned by each spouse.

After inflation indexing the joint exemption in 2018 is $22.36 million ($11.18 million for each spouse). (The IRS finalized the 2018 levels on March 4. The amount was in doubt, because the Tax Cuts and Jobs Act changed the inflation-indexing method.)


Unfortunately, the portability of the exemption isn&a;rsquo;t automatic. The transfer of the unused exemption amount to the surviving spouse happens only if it is elected by the executor of the first spouse to pass away. It is elected simply by filing an estate tax return.

Very few estates are required to file returns, because the high exemption amount means few will be taxable. Because few estates are required to file estate tax returns, executors who don&a;rsquo;t understand the portability rule can inadvertently cause the unused exemption amount not to be transferred to the surviving spouse. Whenever an estate doesn&a;rsquo;t file an estate tax return, the unused exemptions aren&a;rsquo;t transferred to the surviving spouse.


Executors and surviving spouses need to know that an estate tax return should be filed, even when not required, to transfer the unused exemption amount to the surviving spouse.

The first five parts of this series are:

&l;a href=&q;https://www.forbes.com/sites/bobcarlson/2018/03/06/7-big-estate-planning-mistakes-leaving-assets-outright-to-adult-children/#634081b037e1&q;&g;Leaving Assets Outright to Adult Children&l;/a&g;

&l;a href=&q;https://www.forbes.com/sites/bobcarlson/2018/02/21/7-big-estate-planning-mistakes-part-1/#162236505d06&q;&g;Relying Only On A Will&l;/a&g;

&l;a href=&q;https://www.forbes.com/sites/bobcarlson/2018/02/23/7-big-estate-planning-mistakes-part-2/#b71bca722b52&q;&g;The Power Of Attorney Trap&l;/a&g;

&l;a href=&q;https://www.forbes.com/sites/bobcarlson/2018/02/26/7-big-estate-planning-mistakes-not-avoiding-probate/#25612f8c4503&q;&g;Not Avoiding Probate&l;/a&g;

&l;a href=&q;https://www.forbes.com/sites/bobcarlson/2018/02/28/7-big-estate-planning-mistakes-not-making-full-use-of-a-living-trust/#44f0ccb327e2&q;&g;Not Making Full Use Of A Living Trust&l;/a&g;

&l;!–donotpaginate–&g;&l;/p&g;

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