9108 / What is portability?

Portability allows a surviving spouse to use any of a deceased spouse’s unused transfer tax exemption amount—thereby increasing his or her own estate and gift tax exemption amount in order to exclude more of assets from transfer tax liability. The portability provision was made permanent by the American Taxpayer Reform Act of 2012.

Generally, a surviving spouse may apply the deceased spouse’s unused estate tax exclusion amount to the surviving spouse’s own transfers if portability is elected by filing a timely estate tax return (typically, within nine months of the date of death, with an automatic extension of six months). While an estate that does not exceed the estate tax exemption amount is not generally required to file an estate tax return, a return is required in order to elect portability.¹ If an estate tax return is not required because of the estate’s value, the IRS has provided a simplified method for requesting an extension of time to elect portability. The extension is available if the decedent was survived by a spouse, died after 2010 and was a U.S. citizen. In order to obtain the extension, the executor must file a completed Form 706 (the estate tax return) on or before the later of January 2, 2018 or the second anniversary of the decedent’s date of death. At the top of Form 706, the executor must state that the return is “Filed pursuant to Rev. Proc. 2017-34 to elect portability under § 2010(c)(5)(A)”.²

The Tax Court has held that the estate tax return of a predeceased spouse could be examined in determining the correct DSUE amount for a surviving spouse seeking to take advantage of portability. This was the case even though the period of limitations for assessment had expired with respect to the return. In this case, one spouse died and reported DUSE of about $1.26 million and elected portability. The return was accepted by the IRS as filed. The next year, the surviving spouse died and claimed the reported DSUE amount on her estate tax return. The IRS examined both the returns of the surviving spouse and predeceased spouse, and determined that the predeceased spouse had failed to report certain taxable gifts, so reduced the DSUE amount and applied an estate tax deficiency with respect to the surviving spouse’s return. The Tax Court found this permissible despite the fact that the IRS has issued a closing letter with respect to the predeceased spouse’s return but, because there was no agreement resulting from negotiations between the estate and IRS, the letter was not a closing agreement. Further, examination was not an impermissible second examination because the IRS did not obtain any new information from the estate.³