Estate Tax “Portability”
In 2010 Congress introduced estate tax “portability” for estates of decedents who die in 2011 or 2012. For estates of decedents dying in 2011 or 2012 the estate can generally exclude up to $5 million from their taxable estate. If a married individual dies in 2011 or 2012 and they do not use their full $5 million exclusion the unused amount can be passed on to the surviving spouse. In other words, the exclusion is “portable”. This sounds simple enough right? Let’s take a closer look at the details.
First off, the estate’s executor must make an election to take advantage of the portability of the unused exclusion. The transfer of the unused exclusion to the surviving spouse is not automatic! The election is irrevocable and must be made by filing a timely, complete estate tax return. This means in order to make the portability election you must file an estate tax return, even if the gross estate is less than $5 million and a return would otherwise not be required.
Secondly, the portability rules only apply to decedents dying in 2011 or 2012. It is not yet clear what Congress intends to do if an unused exclusion is transferred to a surviving spouse and that spouse lives past 2012. The provision could be extended or the transferred exclusion may just disappear.
Next, the portability provisions apply only to the estate and gift tax exclusions. They do not apply to the generation skipping tax exemption. Any unused GST exemption does not transfer to a surviving spouse, even if the portability election is made for estate and gift tax purposes.
Finally, if the surviving spouse remarries the portability provisions apply with regards to the most recently deceased spouse. If the new spouse was to die, the new spouse is the most recent decedent and the exclusion transferred from the previous spouse is lost. For example, say Bob and Sue are married. Bob died in 2011 with a $4 million estate. The executor of the estate makes the election to transfer Bob’s unused exemption of $1 million to Sue. Sue’s exemption is now $6 million. Sue then marries Jim but Jim dies in 2012 with an estate equal to $5 million. Sue would lose Bob’s transferred exemption because Jim is now her most recent deceased spouse. Sue would now have only a $5 million exemption because she has lost the extra $1 million from Bob’s estate.
So is there any reason why you wouldn’t want to make the portability election? A few things to consider are the additional cost to complete the estate tax return in order to make the election when there may not have been a filing requirement otherwise. Also, making the election extends the statute of limitations for the estate tax return. Finally, the portability provisions expire 12/31/2012 and the benefit of the portable exclusion may be lost if the surviving spouse is still alive. As with many tax laws the rules are complex and the variations can be numerous. The specific facts and circumstances of each situation must be taken into account before any decision is made.