One important fact about federal estate taxes in California and nationwide is that a decedent has a $5.45 million gift and estate tax exemption at death. This generally excludes those in the middle class of the economy from incurring a federal estate tax, and generally eliminates the issue from their estate planning considerations. However, more and more people are facing the potential of being wealthy enough at death to want to plan correctly for the possibility of a federal estate tax at death.
In prior years and decades, a federal estate tax was more prevalent because the exemptions were lower. The current exemption amount came after gradual increases over the years and was passed in 2010. The tax law passed that year also created a vital provision called portability.
Portability says that the surviving spouse's estate may use any remaining portion of the $5.45 million exemption that was not used by the spouse who died first. This is called the deceased spousal unused exemption amount. Along with the exemptions and portability, there was also a 40 percent maximum rate, lowered from 55 percent, applicable to any amounts subject to the federal estate tax.
In the past, spouses had to use multiple, sometimes complex, trusts to avoid or lessen the federal estate tax bite. Of course, successful estate planning can maximize the amount of the assets that one's children will be able to inherit. Estate planning attorneys and tax specialists now coordinate the unlimited marital deduction with the estate tax exemption to assure the sheltering of at least $10 million from the federal tax.
This is done by using the unlimited marital deduction when the first spouse dies. Those assets may, for example, total $5 million, but they are exempt due to the marital deduction. The full unused $5 million is then available to the surviving spouse's estate when she dies, giving the estate a total of $10 million in assets sheltered from the federal estate tax. That estate planning outcome demonstrates the utility of the portability feature in California and all other jurisdictions.
Source: shawneemissionpost.com, "Estate Planning KC: Portability is a thoroughly modern estate tax break", Todd Rassmussen, March 20, 2017