Portability Elections

11/03/2011

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Act") created a provision commonly known as "portability" that allows a surviving spouse to apply any unused portion of his or her deceased spouses’ estate tax exclusion to reduce the surviving spouses own estate tax liability.  In essence, portability can allow a "richer" spouse to use the unused estate tax exclusion of a "poorer" spouse so that the total estate tax exclusion can be utilized without having to divide up assets or worry about who died first. 

Currently, a married couples combined exclusions total $10 million ($5 million per spouse and not counting adjustmentsation after 2011) for decedents dying in 2010 through 2012. Beginning in 2013, the exclusion amount reverts back to the level set forth under 2001 law ($1 million per spouse, as indexed since 2001), unless Congress takes action before then.  There has been some talk that the so-called "Super Committee that is supposed to make budget recommendations may seek to lower the exemption amount earlier, but so far this is just talk since it has not released any report or recommendation yet.

Recently, the IRS released a notice (Notice 2011–82) which provides that personal representatives of estates of decedents dying after December 31, 2010, must file a Form 706 (United States Estate and Generation-Skipping Transfer Tax Return) within the time prescribed by law (generally 9 months after the date of death, plus any extensions) in order to elect and take advantage of the deceased spouse’s unused exclusion amount (and the new law's portability provisions).

In particular, to make a portability election, the personal representative is required to file Form 706 for the decedent’s estate, even if no estate tax is due or the personal representative is not otherwise obligated to file a Form 706.  The notice also states that the estate will be considered to have made a portability election if a Form 706 is timely filed in accordance with the instructions for that form.  Once an election is made, it is irrevocable.

The bottom line is this.  As a general rule and assuming estate taxes are or may be a concern, married couples will want to ensure that the unused exclusion amount of the first spouse to die will be available to the surviving spouse.  Consequently, the estates of most married decedents dying after December 31, 2010, will want to make the portability election.