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Portability, Estate Taxes, and Your Estate Plan

Some people in the Greensboro, North Carolina area who begin estate planning often worry about the estate tax. The federal estate tax applies to the property left behind by people who die. However, the estate tax, sometimes referred to as the “death tax,” is not a significant concern for the vast majority of people.

In 2013, Congress passed a law that effectively ensured the estate tax would only apply to the wealthiest Americans. This is primarily because of two main reasons: individual exemptions and portability. To better understand why you will probably not have to worry about the estate tax, we need to look more closely at these two important concepts.

Estate Taxes and Estate Tax Exemption

Let’s say you die leaving behind an estate worth $3 million. After you die, someone will have to take over managing all of your property. That person, called an executor or personal representative, will also have to determine if your estate will have to pay any estate taxes. Because your estate is worth $3 million, your estate will not have to pay any estate taxes because the total value of your estate is less than the individual exemption amount of $5.34 million. The exemption amount is the value of an estate that each individual is allowed to keep before the estate tax applies.

Portability and Exemptions

Let’s say your grandfather dies in 2014 and leave behind an estate worth $7 million. Normally, that estate would have to pay at least a portion of its value as an estate tax. However, by applying the principle of portability, your grandfather’s estate might also be able to avoid paying any estate taxes.

Portability is the ability to use a spouse’s unused estate tax exemption amount when calculating the individual amount that applies to the surviving spouse’s estate. For example, let’s say you’re grandfather’s wife died in 2013 and left behind an estate worth $1 million. When your grandfather dies, he can use the exemption amount his wife failed to use and add it to his own.

In other words, your grandfather can add the $4 million exemption that your grandmother didn’t use to his own individual limit, effectively giving him a personal exemption amount in excess of $9 million. Because he died leaving behind an estate worth $7 million, his estate will also be able to avoid having to pay any estate tax.

Of course, determining whether portability applies, calculating how much you can exempt, and making choices about the best way to protect yourself and your estate often requires expert guidance. If you have a questions about estate taxes or portability, contact us as soon as possible.

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