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Student Question of the Week: The Applicable Exclusion Amount

Student Question from Andy M
Course: Estate Tax Planning

Student Question:

A correct response to a question in the textbook reads, “If an individual does not use the Unified Credit, it cannot be TRANSFERRED to others for their use.” Although the 2014 Unified Credit of $2,081,800 is not the same as the $5,340,000 Applicable Exclusion Amount, the credit is used to pay the taxes on the exclusion amount.”

From the online content:

“In addition, the 2010 Tax Relief Act introduced, and the 2012 Tax Relief Act extended and made permanent, a new concept known as the “portability” of the Applicable Exclusion Amount. By portability, we mean that it is now possible for the unused portion of a Deceased Spouse’s Applicable Exclusion Amount to be TRANSFERRED to the surviving spouse. This is accomplished by filing an estate tax return and not opting out of portability on the return.”

So my question is, by transferring the Applicable Exclusion Amount, isn’t this essentially the same as transferring the Unified Credit?


Instructor Response:

Hi Andy!

That’s a great question. There is indeed a subtle yet critically important difference.

First, let me put a couple of terms into context. The Applicable Exclusion Amount is merely the amount of money that may be transferred to another without the payment of gift or estate tax.  The amount of gift or estate tax assessed against a taxable transfer of $5,340,000 (2014) is $2,081,800.  The Unified Credit (2014) is $2,081,800. Hence, the Unified Credit effectively shelters $5,340,000 in taxable transfers from the gift or estate tax.

Now I’ll address your specific question. The Applicable Exclusion Amount can be used to shelter the transfer of wealth to anyone while portability can only be used to transfer the Deceased Spouse’s Unused Exclusion Amount to the surviving spouse.

Let me know how that helps answer your question.

Bruce