Estate tax regulations provide for portability

Estate tax regulations provide for portability

Legislation enacted in 2010 provided an important estate tax benefit to married couples where the one spouse dies after December 31, 2010 and before January 1, 2013 and is survived by the other spouse. This benefit is known as portability.

For 2011 and 2012, the estate of a deceased individual is entitled to an estate tax exclusion of $5 million. Thus, the estate does not have to pay any estate tax on the first $5 million of estate tax property (determined after the allowance of various deductions).

Carryover of unused amount

If the estate does not need to use the entire $5 million exclusion, the unused exclusion can be now transferred to the estate of the surviving spouse rather than wasted. The IRS identifies this unused estate tax exclusion as the deceased spousal unused exclusion (DSUE). If the deceased spouse had made any gifts before dying, the DSUE is calculated based on the amount of the gift (up to the $1 million gift tax exclusion). The surviving spouse's $5 million estate tax exclusion is increased by the DSUE.

Example 1. Tom and Betty are married. Tom dies in 2011 with a taxable estate of $3 million. Tom's DSUE is $2 million ($5 million less the $3 million estate). When Betty dies, her estate can take an estate tax exclusion of an additional $2 million on top of the regular exclusion ($5 million for 2011 and 2012, subject to change in post-2012 years. Thus, assuming that the regular estate tax exclusion is $5 million when the surviving spouse dies, the total exclusion in the survivor's estate is $7 million ($5 million plus $2 million).

Example 2. The facts are the same, except that Tom made a gift of $1 million is 2009. No gift tax was due because of the gift tax exclusion. The DSUE is $1 million ($5 million less the sum of the $3 million estate and the $1 million gift).

Rules for electing portability

Portability is optional, although it would seem to benefit most estates. The IRS has now issued regulations to explain how estates can elect portability. The regulations require that the executor of the deceased spouse's estate make an affirmative election. The estate makes this election by filing a complete and properly-prepared estate tax return (Form 706) with the IRS.

To make an election, an executor of a small estate (under $5 million) also has to file an estate tax return, even though the estate might not normally have a filing requirement. The regulations simplify some of the reporting requirements if the estate would not normally have a filing requirement.

For the election to be valid, the estate tax return must be filed timely. The estate tax return is due within nine months of the date of death. An estate can obtain one six-month extension to file the return, for a total of 15 months. Every estate making an election must file a timely estate tax return.

If the executor does not wish to elect portability, the executor must provide a statement on the estate tax return that the estate is not electing portability. If the estate is a small estate that does not have a filing requirement, the estate can opt out of portability simply by not filing a timely return.

The DSUE amount is computed using the exclusion of the "last-deceased" spouse. If a spouse dies and the survivor remarries, the regulations explain how to calculate the DSUE.