Since 2011, married couples in Wisconsin are able to use portability of estate tax exemptions. This means that upon the first spouse’s death, their unused estate tax exemption would “port” over to the surviving spouse. In 2014, each person has an estate tax exemption of $5.34 million, so a person can transfer $5.34 million free of estate tax. Any amounts over the $5.34 million exemption would be subject to estate tax. Portability allows a married couple to combine their estate tax exemptions for a total of $10.68 million. For example, Spouse A dies this year with an estate worth $4 million. Spouse B would file a federal estate tax return for Spouse A using $4 million of Spouse A’s estate tax exemption and porting over the remaining $1.34 million to Spouse B. Spouse B now would be able to exclude $6.68 million from estate tax at Spouse B’s death.
On October 6, 2014, the U.S. Supreme Court declined review of the Wolf v. Walker, 986 F.Supp.2d 982 (W.D. Wis. 2014), thus providing marriage equality for same-sex couples in Wisconsin. Prior to that decision, many same-sex couples prepared estate plans that closely approximated a marriage-like relationship, but likely they did not have portability of estate tax exemptions as part of their estate plan. With the law change in Wisconsin, same-sex couples should review their prior estate plans to see if planning to use estate tax portability is a good fit.
Like most estate planning tools, portability has advantages and disadvantages. One major benefit of portability in estate planning is that it takes advantage of the stepped-up income tax basis of assets twice: once when the first spouse dies and again when the surviving spouse dies. Two step-up basis increases in assets that are held for a long time could provide substantial tax savings to a couple. In contrast, prior to the availability of portability, one typical estate plan was to divert assets equal to the then existing estate tax exemption to a credit shelter trust. The credit shelter trust estate plan allows for one step-up in income tax basis. Another benefit of using portability is that it is a simple method of planning without the use of complex trusts.
As mentioned earlier, there are some disadvantages to portability. First, in order to use portability, the surviving spouse must file a federal estate tax return. The filing of a federal estate tax return can be time consuming and costly. Second, portability planning only provides tax advantages to the spouses and does not take into consideration shielding the assets from taxation for future generations.
Each couple must weigh the potential advantages and disadvantages of using portability as a method of reducing estate tax. It is important to discuss whether or not to make changes to your estate plan with an estate planning attorney. If you have questions about your estate plan, please contact a member of the Stafford Rosenbaum Trust and Estates team.