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Craig's Corner - Wealth Planning Insights

Tuesday, June 17, 2014

WHAT IS ESTATE TAX "PORTABILITY" & HOW DOES IT AFFECT ME??

IRS Provides “Last Chance” Extension for Small Estates That Want Portability.

At the end of 2012, the entire country watched as major changes were made to income tax  laws with the adoption of the American Taxpayer Relief Act of 2012 (ATRA). The act also made significant changes in estate tax laws.

Estate Tax Portability

One important change is that the estate tax portability law is now permanent.  Estate tax portability means that the unused portion of the first-to-die spouse’s estate tax exemption passes to the surviving spouse.  The current estate tax exemption is $5.34 million ($5 million with adjustments for inflation).  This means that a married couple’s total estate tax exemption is currently $10.68 million.  For example, a husband dies with $2 million in separate assets.  He has $3.34 million remaining in his estate tax exemption, which passes to his wife, giving her a total of $8.68 million in estate tax exemption.  Without portability, the husband’s remaining exemption might have been lost if the couple had not implemented special tax planning techniques as part of their estate plans.

How Do You Claim the Portability?

This is where married couples and estate executors can get into trouble.  The estate tax portability rule only applies to decedents dying after December 31, 2010, and not automatic.  In order to claim the remainder of the first-to-die spouse’s estate tax exemption, the surviving spouse or the deceased spouse’s estate executor must file an estate tax return soon after the death, usually within nine months after date of death.  If this filing deadline is missed, then the couple will not get the benefit of estate tax portability.  Missing the estate tax filing deadline can result in hundreds of thousands of unnecessary and avoidable estate taxes.

In a recent report in The Wall Street Journal, estate planning experts expressed concern that executors of small estates may be unaware of the estate tax return filing requirement and may believe that an estate tax return is unnecessary if the deceased spouse’s assets fall under the $5.34 million exemption amount. To preserve portability, however, the estate tax return must be timely filed after the first spouse’s death.  Alternatively, married couples can utilize a special trust, referred to as a “credit shelter trust” or “bypass trust” to prevent forfeiture of their individual exemptions.  This planning technique must be undertaken when both spouses are still alive.

 The Consequences of Failing to File an Estate Tax Return

As a simple example, consider a husband and wife who have a total of $8 million in assets, owned equally by the spouses ($4 million each).  Upon the wife’s death, the wife’s share is left to the husband and estate’s executor files a timely estate tax return and the wife’s $5.34 million in estate tax exemptions passes to the husband.  When the husband dies, his entire $8 million estate passes to his heirs tax free, even though his personal estate tax exemption is only $5.34 million.  If portability is not claimed, then $2.66 million of the husband’s estate will be taxed (the current rate is 40 percent).  The husband’s heirs would be required to pay approximately $1,064,000 in estate taxes which could have been avoided if the wife’s estate executor had filed an estate tax return within the time limit.

Even if both spouses together have assets under the current $5.34 million exemption, it is still a good idea to file an estate tax return after the death of the first spouse.  Filing the estate tax return and preserving the portability benefit protects the surviving spouse’s heirs in the event the surviving spouse receives a windfall during his or her lifetime that raises his or her assets above the $5.34 million exemption level.

What If You Have Already Missed the Deadline to Elect Portability?

Portability was originally enacted as a “temporary” concept for persons dying in 2011 and 2012, but was made “permanent” in the 2012 Tax Act that technically took effect on January 1, 2013.  Further, the IRS did not provide proper guidance or rules on how to elect portability until 2013-2014.  As a result, many surviving spouses and executors did not timely file the decedent’s estate tax return to elect portability for decedents dying prior to 2014.

Due to the delay in providing a “permanent” law and proper guidance on the filing of the portability election, the IRS issued Revenue Procedure 2014-18 which provided an automatic extension of time to make the portability exemption for the estates of decedents that died before January 1, 2014, that otherwise fall below the decedent’s exemption amount for having to file an estate tax return.  In effect, the IRS is giving taxpayers a “last chance” / “second bite at the apple” to put portability in place for the surviving spouse if they did not timely prepare an estate tax return after the decedent’s date of death.  In order to qualify for the automatic extension, the following requirements must be met:

  • The taxpayer is the executor of the estate of a decedent who:
    • has a surviving spouse;
    • died between on or between January 1, 2011 - December 31, 2013; and
    • was a citizen or resident of the U.S. on the date of death;
  • The taxpayer was not otherwise required to file an estate tax return based on the value of the gross estate;
  • The taxpayer did not file an estate tax return within the time prescribed by law for filing an estate tax return required to elect portability;
  • A person permitted to make the election on behalf of a decedent must file a complete and properly prepared Form 706 on or before December 31, 2014; and
  • The person filing the Form 706 must state at the top of the Form 706 that the return is "FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER CODE SEC. 2010(c)(5)(A)."

The decision whether to elect portability is confusing and involves many factors, including the type and extent of your assets, what state in which you may live in the future, the need for asset protection, and the language in your existing estate planning documents.  You are invited to contact us for a complimentary appointment to discuss whether you should elect portability, either for a spouse who has previously died or in the future as part of your existing estate planning.


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S. Craig Stone II of Stone Law Offices, Ltd. serves clients throughout Clark County, Southern NV, Las Vegas, Henderson, Boulder City, North Las Vegas, Summerlin, Carson City, Reno, Washoe County, and Nye County. Also serving clients with asset protection nationwide.



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