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Blog

Feb 26, 2014

Retroactive Extension for Portability of Deceased Spouse’s Unused Estate Tax Exemption Available

Example: Bob and Jane were married when Bob passed away in 2012. Bob’s estate was valued at $3,700,000. Since Bob’s estate plan passed his entire estate to his wife, Jane, the Federal estate tax would have been zero due to the unlimited marital deduction afforded under the Internal Revenue Code. Since Bob’s estate did not utilize any of his federal estate tax exemption ($5,120,000 for individuals who died in 2012), the exemption would have been “wasted.” However, under the portability provisions of the federal estate tax, Bob’s estate could have elected to pass that unused exemption to Jane by filing a Federal Form 706 and making the “portability election” on Bob’s estate tax return, resulting in Bob’s unused estate tax exemption of $5,120,000 being transferred to Jane along with an increase in her future estate tax exemption by this unused amount.

The highest marginal estate tax rate is currently 40%; therefore, the unused exemption passed from a decedent to his or her spouse via the “portability election” amount can result in significant estate tax savings.

 

Example: Suppose Jane in our prior example passed away in 2013. Assuming that Jane’s estate was valued at $6,000,000, if the “portability election” had not been made on Bob’s estate tax return, Jane’s taxable estate would be $750,000 ($6,000,000 less the $5,250,000 exemption for someone who dies in 2013). However, if the election had been made on Bob’s return, Jane’s taxable estate would be zero, as her total exclusion would be $10,370,000 (her $5,250,000 plus the portability from Bob’s estate of $5,120,000). Making this election would thus result in a sizable reduction in estate taxes.

A surviving spouse can apply the unused exclusion amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death.

Making the Election – To make the portability election, an estate tax return must be filed, even if the estate would not otherwise be required to file an estate tax return. Failure to file the estate tax return would result in the loss of the portability of the spouse’s unused exclusion amount.

When a surviving spouse’s estate is expected to be valued at less than the estate tax exclusion amount when he or she passes, it may seem to be a waste of time and money to file a 706 Estate Tax Return for the pre-deceased spouse. However, in making that decision, one should consider the possibilities of the surviving spouse receiving inheritances or winning the lottery, or of Congress reducing the estate tax exemption at some time in the future. Any of these potential events could result in substantial estate tax considering the current tax rate on taxable estates is 40%.

In January 2014, the IRS announced it was allowing a retroactive extension to make the portability election for estates that were not required to file Form 706. Prior to the IRS announcement, a return had to be filed in a timely manner to make the portability election. Now with the automatic retroactive extension, if the decedent spouse died in 2011, 2012, or 2013, it is possible to make the election by filing the required Form 706 through December 31, 2014. This special extension does not apply to situations in which Form 706 was required to be filed by the size of the estate or in which Form 706 was already filed for the year in question.

If you believe that the election to transfer any unused exclusion to a surviving spouse applies to you, family members, or friends and would like additional information, please give this office a call.