Portability of Unused Estate Tax Exclusion Amount between Spouses

Brandon Farmer, Tax Intern, and Donna Ryan, Tax Principal
February 2014

Benjamin Franklin famously coined the phrase, “In this world nothing can be said to be certain, except death and taxes.” This is especially true when a deceased person’s estate is subject to the federal estate tax.

The federal estate tax applies to the transfer of a person’s property at the time of his or her death. The tax, if any, is based on the value of all assets at the time of death. Fortunately, the law provides each individual with credits that work to exclude a base amount from the estate tax. For deaths occurring in 2014, the credit works to shelter the first $5,340,000 of the decedent’s assets from the estate tax. The practical application of this provision is as follows: if a deceased person’s estate exceeds the applicable exclusion amount, the executor of the estate must file a Federal Form 706, U.S. Estate Tax Return.

Let’s assume that Jack’s assets are worth $4 million. Since no estate tax filing is strictly necessary (Jack’s estate is below the $5.34 million current threshold), the personal representative of Jack’s estate may decide not to file Federal Form 706. But wait….not so fast. This personal representative might be missing a valuable opportunity!

If no estate tax is due, why choose to file Federal Form 706?

The reason: portability. It’s a relatively new concept in the estate tax law and here’s the explanation. Exemption amounts that go unused on the first spouse’s death (typically because most of the estate goes directly to a surviving spouse) can be preserved for possible use at the time of the survivor’s death – but only if Form 706 is filed on behalf of the first spouse to die.

Let’s return to the example above for a moment. Jack has died owning $4 million in assets, leaving it all to Jill. What we didn’t tell you is that Jill owns assets worth $2 million. After Jack’s death and distribution of his assets to her, Jill’s assets are worth $6 million. Jill has an estate tax problem, since her individual credits will only shelter $5.34 million from estate tax on Jill’s death under current law.

In our example, the personal representative of Jack’s estate had the opportunity to file Form 706 and make an election to preserve Jack’s unused credits for Jill. By doing so, Jill’s estate might pay no federal estate tax at all. To put this in perspective, using current law, Jill’s estate could save $256,000 in estate tax if Jack’s estate has filed Form 706 and properly made an election to preserve unused exemption on his death. For larger estates, the numbers are even more compelling.

And here’s the best part – we actually received good news from the IRS about two weeks ago. The Service announced a simplified way to request an extension of time to make the “portability election.” Personal representatives for estates of spouses who died in 2011, 2012 and 2013 and that did not timely file an estate tax return to make an election now have until December 31, 2014 to do so. This presents a unique opportunity to reconsider a missed election and possibly save a great deal of tax for some families. If you would like more information, please feel free to contact Jean McDevitt or Donna Ryan.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

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