The Congressional extension of the “Bush tax cuts” in late 2010 included for the first time a rarely-discussed provision that can result in significant estate tax savings. Known as “portability,” the provision allows the Personal Representative of the estate of the first spouse to die to elect to preserve such deceased spouse’s unused federal estate tax exemption amount for the benefit of the surviving spouse. For example, imagine a married couple with combined assets of $2 million. The husband dies when the federal estate tax exemption is $5 million. His $1 million estate passes to the wife free of federal estate tax under the husband’s Will, but the $4 million excess exemption evaporates. Commentators had asked: what if the surviving spouse could claim that excess exemption and add it to her own exemption, so that an even larger portion of her property would pass free of federal estate tax at her death? In our example, if the surviving spouse claimed the deceased spouse’s $4 million of unused exemption and died when the exemption was $5 million, she would have $9 million of combined exemption available at her death. In other words, her estate would have to exceed $9 million for federal estate tax to apply.
Because the deceased spouse’s exemption is now “portable” to the surviving spouse, commentators called this concept “portability.” The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted in December 2010 included portability for the first time, and portability was also included in the “fiscal cliff” tax legislation passed in early January 2013, the American Taxpayer Relief Act. Since then, the IRS has been issuing guidance for Personal Representatives to make the portability election. Most importantly, the election is made by filing a federal estate tax return, Form 706. However, preparing a federal estate tax return can be burdensome for smaller estates not otherwise required to file the return. Temporary regulations recently issued by the IRS allow Personal Representatives to estimate estate asset values and thereby potentially limit the burden and costs of return preparation.
While making the portability election is generally beneficial, each circumstance is different, and in some cases making the election may not be worthwhile. The IRS retains authority at the death of the surviving spouse to examine the portability election made on the return of the first-to-die spouse, and some practitioners are concerned that this power could be used to essentially re-audit the return of the first spouse to die’s estate. Please also note that there is no state-level portability election. Our office is ready to assist Personal Representatives with evaluating whether to make the portability election.