Overlooking the need to elect portability is a common mistake—and one that can lead to the loss of valuable estate tax savings down the road.
Because of the generous federal estate tax exemption, most upper middle class clients understandably fail to realize the need for making a portability election in order to preserve the portability option for the future. Fortunately, the IRS has provided relief for certain clients who have failed to make a timely portability election (typically without the need for an expensive private letter ruling)—but for many clients, advisors need to remain vigilant in ensuring that the need for making a portability election is even on the client’s radar following the death of a spouse.
The Portability Rules
Portability simply allows a surviving spouse to make use of both his or her individual federal estate tax exemption and the exemption granted to a first-to-die spouse. Because every decedent is allowed an exemption of $5.49 million in 2017, this allows a married couple to shelter a combined $10.98 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.
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 or her 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.
The Good Cause Extension