The term “portability” is an odd word to associate with the federal estate tax. However, the use of the term is in tax law is similar to our everyday usage; it means that you can move something from one place to another. In the federal estate tax law context, “portability” refers to the ability of the second spouse to die to use the deceased spouse’s unused exemption amount. The deceased spouse’s unused exemption amount is abbreviated, “DSUEA.”
The goal federal estate tax portability law is to give full federal estate tax exemption to all married couples, even those who didn’t engage in comprehensive estate planning and whose estate plan didn’t include tax planning or proper asset allocation. This is a great concept; however, the law itself has many issues that doom it to failure, in most cases.
Portability law ends January 1, 2013; so, unless you and your spouse are both set to die in the next year or so, you will not benefit from portability.
Portability benefits require the executor of the first estate to both file a federal estate tax return and indicate on the return that the surviving spouse is permitted to use the DSUEA. What if the executor doesn’t comply as may be the case in a blended family?
What if the surviving spouse gets remarried and that second spouse dies before her? When measuring DSUEA, only the “last” spouse to die counts.
Portability law and benefits are uncertain; there is likely to be much confusion and litigation. To avoid the potential portability quagmire, consult with a qualified estate planning attorney and include comprehensive federal tax planning and proper asset ownership in your estate plan. It is likely in your best interests to act as if portability doesn’t exist.