Under current estate tax laws each individual is entitled to a 5.340 MILLION dollar (this amount is adjusted each year for inflation) exemption (technically an “applicable exclusion amount”) when they die. Thus, if you have under 5.340 Million (which most of us have) no estate tax will be due. However, if you have more that 5.340 million the estate tax rate 40% of the excess over 5.340 million! Congress enacted a concept called “portability” a couple of years ago which means that a surviving spouse can “port” over the unused applicable exclusion amount from the first to die. A simple example will help.
Albert is married to Alberta. Albert has just died but because of the way the Gators played last year his assets tumbled dramatically and his net worth is 2 million instead of 10 million. Upon his death no estate taxes are due because all of his assets were distributed to his wife, Alberta (Congress allows a 100% marital deduction). Alberta can now use ALL of Albert’s unused applicable exclusion amount (5.340) when she dies. Now if Alberta dies when the Gators win the national championship her net worth could be 20 million! Thus, she could use her applicable exclusion amount (currently 5.340 or the inflation adjusted amount) PLUS Albert’s 5.340 applicable exclusion amount which is an ADDITIONAL savings of 2.136 MILLION in estate taxes.). Of course the rules are more complicated especially if there is a remarriage or gifting during Alberta’s life.
So… let us say you are planning on marrying a person of great wealth.. that estate tax applicable exclusion amount is worth something to your new spouse (and most importantly to his or her children, if any) because the excess of the applicable exclusion amount not used at your death can create a huge savings to your spouse’s estate, thus increasing the amounts distributed to his or her children!
Bottom Line… If you are getting married and entering into a prenuptial agreement discuss this valuable asset and make sure that all parties understand the value of that portability gift.
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