An important component of any estate plan in Colorado is a strategy to account for the potential for estate taxes. Most people may view such an expense as inevitable, yet that is not the case.

Per the Colorado General Assembly, the state has not collected estate taxes from its residents since 2014. This means that the only potential tax liability local residents need concern themselves with comes from the federal government. Yet one might even be able to avoid that potential expense (with proper planning).

The federal estate tax threshold

Yet before one worries themselves over the potential of a federal estate tax liability, they should first know whether they will even owe taxes in the first place. The federal government sets an annual estate tax exemption amount to determine which estates will be subject to tax. According to the Internal Revenue Service, the exemption threshold for 2021 is $11.7 million. Executors for any estates whose total taxable value falls below that amount are not required to file a federal tax return.

Estate tax portability

The process of portability allows married couples to effectively double their estate tax exemption amount, protection up to $23.4 million to pass on to future generations. Portability refers to the sharing of tax benefits between eligible parties. This process is not automatic, however, and one must plan to execute it correctly in order to avoid inadvertently pushing the value of their spouse’s estate above the exemption threshold.

First, one must plan to leave their entire estate to their spouse. This preserves their entire exemption amount (as their estate plans instead utilize the unlimited marital deduction). Their ex-spouse can then claim the unused portion of their estate tax exemption by filing a return electing portability within nine months of their death.