What is Portability?

2010 Tax Relief Act

The 2010 Tax Relief Act (a.k.a. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010) provided us with a $5 million federal estate tax exemption and a federal estate tax rate of 35%.  It also introduced a feature called “portability” (see previous Epilawg articles summarizing the 2010 Tax Relief Act:  Estate and Gift Tax Laws 2011 and “Lame Duck” Session is Anything But …).

Portability

In general, portability allows a surviving spouse to use a deceased spouse’s unused exemption amount in addition to his/her own $5 million exclusion for taxable transfers made during life or at death.  Consequently, a couple may ultimately transfer a combined $10 million before being subject to federal estate or gift taxes.  Portability is not available to nonresident alien surviving spouses.

Electing Portability

In order for a surviving spouse to preserve the ability to use the deceased spouse’s unused exemption amount, an election must be made.  The election is made on a timely filed federal estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return).  The IRS recently issued guidance (Notice 2011-82) regarding making the election.

The return must be timely filed, meaning the return must be filed within 9 months after date of death plus a possible extension of not more than 6 months.  The IRS has not yet modified Form 706 to include an affirmative action to make the election (e.g., checking a box, attaching a statement, etc.).  Instead, the IRS stated that an estate will be considered to have correctly made the election simply by timely filing a complete Form 706.  Even if an estate is not otherwise required to file a Form 706, one must be filed in order to preserve the surviving spouse’s ability to use the deceased spouse’s unused exemption.

Additionally, the current Form 706 has not been updated to include a computation of the decedent’s unused exemption amount.  Until such time when the Form has been updated, a complete and timely-filed return is deemed to include such computation.

Be aware that the first tax returns electing portability are due this quarter.  This applies to the surviving spouse of a decedent dying in early 2011 who wishes to preserve the deceased spouse’s unused exemption.

Portability is a new and complex topic; therefore, it is imperative to speak with an estate planning attorney and/or CPA regarding the advantages and disadvantages of portability.