Portability has become an important tool for most couples when it comes to estate planning. The portability election first came into play by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. This election allows a surviving spouse to use a deceased spouse’s unused exclusion amount for gift tax during his or her lifetime and for estate tax at death. For 2017 the federal estate tax exclusion amount is $5,490,000. Since each spouse has his or her own exclusion, portability allows couples to exempt up to $10,980,000 in assets from the estate tax. In order to “port” over the unused exclusion from the first deceased spouse, a Form 706 has to be timely filed, which is 9 months after date of death or if extended, an additional 6 months is allowed to file the return. If the return is not filed within this time frame, executors have to file a request or a letter ruling to obtain the exemption. This letter ruling can be very costly.
On June 9, 2017 the IRS provided a more permanent, simplified method for making a late portability election. Now the estate executor must:
- File a Form 706, estate tax return, on or before the latter of January 2, 2018 or the second anniversary of the decedent’s date of death.
- State on the top of the form that the return is “filed pursuant to Rev. Proc. 2017-34 to elect portability under section 2010(c)(5)(A)”.
If the return is filed after this date, the executor has to file a private letter ruling and pay a fee of $10,000.
The simplified method is allowing executors of anyone who passed away after December 31, 2010 to now file a Form 706 to “port” over the spouse’s unused exclusion amount to the surviving spouse. This new procedure does not apply to taxpayers who already filed an estate return within the allowed time for electing portability or to those who opted out.
It is good to keep in mind the portability election is not without some negative attributes. By making the portability election at the death of the first spouse, the statute of limitations does not close on the first spouse’s estate until the death of the surviving spouse. This gives the IRS the ability to re-examine any issue in the estate of the first spouse.
Also, if the decedent lives in a state which has state inheritance tax, the exemption for that state may be less than the federal exemption.
Please contact the portability experts at KTLLP if you have any questions or need help filing a Form 706.