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Optimizing federal estate tax planning

On Behalf of | Nov 16, 2020 | Estate And Gift Tax Planning, Estate Planning |

Past posts on this blog detailed the fact that New Jersey residents face the potential of their estate being subject to tax once they pass on. With proper planning, however, they may be able to limit that potential liability.

Does the same hold true for federal estate taxes? As is the case with state estate taxes, there is a federal estate tax exemption that allows one to potentially avoid a tax liability. The federal government also offer additional tax planning strategies to help one manage their estate tax burden during the estate planning process.

The federal estate exemption

According to the Motley Fool, the federal estate threshold for 2020 is $11.58 million (that amount increases to $11.7 million in 2021). Any estate whose total taxable value comes in under that amount will not be subject to tax. That amount represents an individual’s potential liability. Married couples may be able to extend that amount even further through portability.

Estate tax portability

The process of portability allows people to share tax benefits. Through estate tax portability, a person can claim the unused portion of their spouse’s exemption and combine it with their own. This may allow one to effectively double their exemption amount to $23.16 million.

To do this, one must plan to leave the entirety of their estate to their spouse. This allows them to take advantage of the unlimited marital deduction (which lets one pass an unlimited amount to their spouse free of taxes). This preserves their entire estate tax exemption. Information shared by the Internal Revenue Service shows that their spouse must then file an estate tax return within nine months of their deaths electing portability. One must ensure they do this last step as portability is not an automatic process.