Newsletter Articles Anderson, O'Brien, Bertz, Skrenes & Golla Law

Federal Estate Tax Alert - Making the Portability Election to Preserve
a Deceased Spouse's Unused Exclusion Amount

Attorney Rick A. Flugaur - December 2011

A simple oversight could result in as much 1.75 million dollars in estate tax exposure for married couples. If a spouse dies in 2011 or 2012 and their estate doesn't take affirmative action to elect the applicable portability exclusion on an estate tax return, their beneficiaries could permanently lose the benefit of the Deceased Spousal Unused Exclusion Amount, which was enacted as part of the two-year estate tax make-over in the Tax Relief Act of 2010 (hereafter "2010 Act").

The Deceased Spousal Unused Exclusion Amount (hereafter "DSUEA") is significant because it allows married couples to fully utilize both spouse's exclusion amounts without having to transfer property to a trust or other beneficiaries (someone other than the surviving spouse) at the death of the first spouse. Now, if the first-spouse-to-die's ("First Spouse") estate does not fully utilize that spouse's exclusion amount, the second-spouse-to-die's (Second Spouse") estate can add the First Spouse's unused exclusion amount to the Second Spouse's exclusion amount, increasing the amount of property that can pass to the beneficiaries estate tax free upon the second spouse's death. Under the 2010 Act, the estate tax exclusion amount was increased to $5,000,000 per person for 2011 and 2012. Thus, the effect of the DSUEA is to allow the second spouse to shield up to $10,000,000 from estate tax without the creation of a credit shelter trust at the First Spouse's death.

On September 29th, the IRS issued guidance on how the DSUEA works. (See Notice 2011-82 and IR 2011-97.) The essence of the IRS guidance on portability is that portability must be elected. If an individual dies after December 31, 2010 leaving a surviving spouse behind, the deceased spouse's estate must make a timely portability election. The executor of an estate that wants to elect portability of the First Spouse's unused exclusion amount must elect portability by timely filing a Form 706, U.S. Estate (and Generation-Skipping) Tax Return, even if the estate is not otherwise required to file an estate tax return. An estate tax return is strictly required for estates of decedents dying in 2011 and 2012 only if the value of the gross estate exceeds $5,000,000. But estates that are not required to file returns will likely want to take that extra step to preserve portability for the Second Spouse's estate. Estate tax returns are generally due nine months after the decedent's death, but estates have the option of paying the estimated correct amount of estate tax due and requesting a six-month extension prior to the returns due date.

In summary, if an individual dies in 2011 or 2012 leaving a surviving spouse behind, it will almost always be advisable to timely file an estate tax return, regardless of whether a return is otherwise required. By way of example, assume Jim dies in 2011 having an estate of $4,000,000. Jim's estate plan transfers all of his property to Nancy, his surviving spouse. Further, assume that Jim made no lifetime gifts. No estate tax return would be required in Jim's estate because his gross estate is less than $5,000,000. Further, assume that the executor of Jim's estate does not file a federal estate tax return to elect portability. Further, assume that Nancy then dies in 2012 having a gross estate of $7,000,000 ($3,000,000 of her assets plus $4,000,000 in assets inherited from Jim's estate). Assuming Nancy made no lifetime gifts, Nancy's estate would be liable for $700,000 in federal estate tax. A $7,000,000 gross estate less the $5,000,000 exclusion results in a $2,000,000 taxable estate multiplied by the 35% tax rate results in a federal estate tax of $700,000.

On the other hand, if the executor of Jim's estate had timely filed a federal estate tax return and elected portability, Jim's unused exclusion amount of $5,000,000 could be added to Nancy's exclusion so that Nancy's estate would have $10,000,000 in exclusion resulting in no estate tax liability.

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Newsletter Articles

Federal Estate Tax Alert - Making the Portability Election to Preserve a Deceased Spouse's Unused Exclusion Amount

Federal Estate Tax Alert - Making the Portability Election to Preserve
a Deceased Spouse's Unused Exclusion Amount