As Colorado residents get deeper into the estate planning process, they begin to notice those opportunities to minimize expenses that might face their estate upon their death. These include creating plans to settle liabilities and avoid the probate process. Many, however, may feel that estate taxes are one expense they cannot avoid.
Yet that may not be the case. Colorado does not impose an estate tax on local residents. Careful and thoughtful estate planning may also allow one to minimize (or even avoid) their federal estate tax liability.
Understanding the federal estate tax exemption
The federal government offers an estate tax exemption, thus preserving those estates whose total taxable value does not exceed the exemption threshold from being subject to taxes. According to the website SmartAsset.com, the threshold amount for 2021 is $11.7 million.
Married couples have the opportunity to extend their collective exemption amounts even further through a process known as estate tax portability.
Taking advantage of portability
Portability refers to the sharing of tax benefits between eligible parties. Estate tax portability allows one to claim their deceased spouse’s unused exemption amount. This process is not automatic, however, meaning that one must first plan to take advantage of it.
To fully optimize the opportunity provided by portability, one should plan to leave their entire estate to their spouse. This allows those assets to pass tax-free thanks to the unlimited marital deduction. This also preserves one’s entire estate tax exemption amount. Then, per information shared by the Internal Revenue Service, their spouse must then file an estate tax return electing portability within nine months of their death. This effectively doubles their estate tax exemption amount to $23.4 million.