Understanding the New Estate Tax Portability Rules
Example: Bob and Jane are married, and Bob passes away in 2012. Bob’s estate is valued at $3,700,000. Since Bob’s estate plan passed his entire estate to his wife Jane, the Federal estate tax would be zero due to the unlimited marital deduction afforded under Internal Revenue Code. Since Bob’s estate did not utilize any of his Federal estate tax exemption ($5,120,000 in 2012), the exemption is “wasted.” However, under the portability provisions of the Federal estate tax, Bob’s estate can elect to pass that unused exemption to Jane by filing a Federal Form 706 and making the “Portability Election” on Bob’s estate tax return. If this “Portability Election” is made on Bob’s estate tax return, Bob’s unused estate tax exemption of $5,120,000 is transferred to Jane and increases her future estate tax exemption by this unused amount.
With the 2001 and 2010 tax acts, Congress increased the estate tax exemption. However, unless Congress acts prior to December 31, 2012, the exemption will return to $1,000,000 in 2013. In addition, the highest marginal estate tax rate will increase from 35% to 55%. If Congress fails to act and allows the exemption to revert to $1,000,000, the unused exemption passed from a decedent to his or her spouse via the “Portability Election” amount can result in very large estate tax savings.
Example: Suppose Jane in our prior example passes away in 2013, Congress does not act, and the exemption drops to $1,000,000. Assuming that Jane’s estate is valued at $4,500,000, if the “Portability Election” had not been made on Bob’s estate tax return, Jane’s taxable estate would be $3,500,000 ($4,500,000 less the $1,000,000 exemption).
However, if the election had been made on Bob’s return, Jane’s taxable estate would be zero, as her total exclusion would be $6,120,000 (her $1,000,000 plus the portability from Bob’s estate of $5,120,000). Making this election would thus result in a sizable reduction of estate taxes.
A surviving spouse can apply the unused exclusion amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death.
Making the Election – To make the portability election, a timely filed estate tax return must be filed, even if the estate would not otherwise be required to file an estate tax return. Failure to file the estate tax return will result in the loss of the portability of the spouse’s unused exclusion amount. A timely filed return is one that is filed on or before the due date of the return, including extensions.
If you believe that the election to transfer any unused exclusion to a surviving spouse applies to you, family members, or friends and would like additional information, please contact our firm.