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What is the portability election?

Like many in Denver, you likely worry that much of the estate that you have accumulated for the purpose of benefitting your spouse and/or your children once you are gone will be eaten up in the fees associated with administration. It is for this reason that you have likely done what is needed to avoid having your estate go to probate or accruing other costs. Yet one potential estate-related expense that many overlook is estate taxes.

There is a good reason why many do not take taxes into account when doing their estate planning; most simply do not have to pay them. You are allowed an estate tax exemption if the taxable value of your estate does not exceed a certain threshold. The Internal Revenue Service lists that threshold as being $5.49 million for 2017.

So, say you have a $3 million dollar estate that you leave to your spouse. Due to the estate’s value being below the threshold, he or she will not have to pay tax on its assets. Yet what if your spouse then goes on to accumulate an additional $4 million in assets and property prior to his or her death? Thanks to the initial $3 million you left to him or her, the value of his or her estate is now subject to tax.

There is a way to avoid this, however. It is known as portability. The portability election allows you or your surviving spouse to claim the unused portion of the other’s exemption, which could protect up to $10.98 million of your combined estates from tax. Yet this is not an automatic benefit. It must be claimed by you or your spouse filing estate tax return (IRS Form 706) within nine months of the others’ death.