Estate Tax Portability

In December 2010, the Tax Relief, Unemployment  Insurance  Reauthorization, and Job Creation Act of 2010 brought about some significant changes to the federal estate tax rules.  One of these changes, which affects married persons dying in 2011 and 2012 and who has an estate less than the $5,000,000 basic exclusion, allows the executor of the decedent’s estate to pass the unused exclusion to the surviving spouse.  What this means is that if the first spouse dies and does not use all of his or her estate tax exemption, then the unused amount of the exemption can be transferred to the surviving spouse.  Therefore, the surviving spouse can use the deceased spouse’s unused exemption amount plus his or her own exemption upon the death of the surviving spouse. In effect, the unused amount of the exclusion of those dying in 2011 and 2012 is portable.
How is this portability election made and when should it be made? It has been noted that the Deceased Spouse Unused Exclusion Amount (DSUEA) is available to the surviving spouse only if the deceased spouse’s executor make a portability election. The portability option must be elected: it is not automatic. The executor of the deceased spouse must elect to transfer the DSUEA to the surviving spouse. This election must be made by filing an estate tax return, Form 706, within nine months of the decedent’s death (or an additional six months if a timely extension to file Form 706 is filed). Instructions to Form 706 indicate the election is made on a timely filed return, including all necessary attachments and supplementary schedules. Form 706 must be filed to claim the election even though a 706 would not otherwise be required.
The portability rules are set to expire after 2012. Additionally, there are different rules to be applied if a surviving spouse remarries. All executors of estates of $5 million or less should be made aware of portability and the election requirements so that this important estate mechanism can be fully utilized.
/posted by Wayne Sturgeon, CPA