September 14, 2015

Understanding Portability of the Estate Tax Exemption

Understanding portability of the estate tax exemption and what it can do for you

Estate planning is imperative to maximizing a family’s hard-earned money and protecting it from potentially large estate taxes. Electing portability of the unused gift-and-estate tax exemption of the first spouse to die can create significant benefits for a surviving spouse. It is crucial, therefore, to pay close attention to estate tax return filing requirements, and deadlines.

There is a common misconception that smaller estates need not invest the time in filing the estate-tax return when a spouse dies, but Maddox Thomson reminds you that things can change. It is important to seek the assistance of an expert that fully understands the benefits and the limits of the portability rules.

First of all, what IS portability?

Portability is the name of a concept that allows a surviving spouse to pick up the unused portion of the lifetime gift-and-estate tax exemption amount, called the Deceased Spousal Unused Exclusion (“DSUE”), without having to set up a trust. Congress first created portability in 2010, and President Obama signed the American Taxpayer Relief Act (“ATRA”) on January 2, 2013, containing a provision to make portability permanent for 2013 and future years.

In 2015, a person may leave his or her spouse up to $5.43 million without incurring an estate tax. This may effectively double the surviving spouse’s lifetime exemption from $5.43 million to $10.86 million. The dollar limit is indexed for inflation, so the permanent exclusion amount will continue to increase in coming years.

How do I file for portability?

A Federal estate tax return, Form 706 that lists the assets and liabilities of a deceased person must be filed. There are no special boxes to check, or statements to make. The estate tax return must be filed nine months after the decedent’s date of death. Requests for an automatic six month extension of time to file are allowed, but only if filed before the original due date of the return. Failure to timely file Form 706 will effectively prevent the portability election.

Should I spend the money to file the Form 706 when the IRS doesn’t require it?

No return is required unless the estate exceeds the maximum of $5.43 million for 2015; however, it is recommended that filing almost always be considered.   It is important to be aware of potential windfalls to a surviving spouse – they may win the lottery, receive an unexpected inheritance, or remarry a wealthy person – all reasons to ensure the additional exclusion is made available.   It can be very costly to assume the estate of the surviving spouse is unlikely to ever exceed the level of his or her DSUE.

 How does this fit into the bigger picture of estate planning?

While portability can be extremely beneficial, it is not the only aspect of estate tax planning. Maddox Thomson has years of experience in preparing estate tax returns, which has allowed us to also offer the unique service of estate administration. In addition to working with you to complete all necessary tax filings, we offer assistance to executors with the proper distribution of assets from an estate, as well as to the beneficiaries by ensuring the appropriate management of assets received from an estate. We understand planning for end-of-life needs can seem overwhelming and you may not know where to begin, but we are here to help.