Ask any estate planning expert in Pennsylvania, and they will likely encourage you to identify those opportunities in the process that allow you to limit the liabilities that may face your estate. Some of those include planning to settle debts before your death and allocating assets to estate instruments that may allow your estate to avoid probate.
Yet you may think that one liability you cannot avoid is estate taxes. However, that may not be the case. First and foremost, Pennsylvania does not impose an estate tax on local residents. On top of that, with the right estate plan in place, you may be able to limit (or avoid) federal estate taxes.
The federal estate tax threshold
The federal government offers an estate tax exemption. The threshold for that exemption changes from year to year. According to information shared by the Internal Revenue Service, that amount for 2021 is $11.7 million. Because of this elevated amount, many estates will not face a tax liability at all.
Your federal estate tax exemption applies only to your individual estate. Thus, while your separate property may not exceed $11.7 million, you and your spouse’s combined estate may. You may think this may impact your estate plans, yet estate tax portability accounts for this.
What is portability?
Portability refers to the sharing of tax benefits between eligible parties. In the case of estate taxes, the law allows your ex-spouse to claim your unused exemption amount (and vice-versa). To do this, your ex-spouse would simply need to file an estate tax return electing portability the same year you die. The deadline to do this is nine months from the date of your death (the IRS may allow added time in certain circumstances).