Today’s generous estate tax exemption has created an unexpected problem among clients: failure to take advantage of the portability of a first-to-die spouse’s unused estate tax exemption. Unknown to many, portability is available only if you ask for it, and failure to elect portability can leave a surviving spouse’s estate facing an unexpectedly heavy tax burden, even if no estate tax was due upon the first spouse’s death.
Luckily, the IRS has provided a limited reprieve for certain clients whose inadvertent failure to make the election could leave them on the hook for an unnecessary estate tax bill. The relief provided by the IRS, however, is limited in both time and scope, so the time to learn the rules of portability is now.
The Rules of Portability
Portability simply allows a surviving spouse to make use of both his federal estate tax exemption and the exemption granted to a first-to-die spouse. Because every decedent is allowed an exemption of $5.34 million in 2014, this allows a married couple to shelter a combined $10.68 million from any federal estate tax liability.
This generous estate tax exemption, however, can often cause a problem for surviving spouses when the entire estate of the first-to-die spouse is sheltered from estate tax. Clients and advisors alike commonly overlook a key requirement for obtaining the benefits of portability: you have to ask for it. Even if no estate tax is due upon the death of a first-to-die spouse, the executor of the estate must elect portability by filing an estate tax return on Form 706 within nine months of death (a six month extension is available if necessary).
Failure to make the election can eventually cause the estate of the second-to-die spouse to bear the entire tax burden, especially because the surviving spouse often inherits the bulk of a deceased spouse’s estate, thereby increasing the value of his own estate. While many clients may believe that the value of their estate could never exceed the $5 million mark, they may be overlooking the fact that the value of the first-to-die spouse’s estate will be included in—and potentially taxed with—their own eventual estate. Revenue Procedure 2014-18