One of the more recent developments in the estate tax planning arena is the concept known as portability. Portability, which was first introduced as a temporary provision under the Tax Relief, Unemployment Re-authorization, and Job Creation Act of 2010 and later made permanent under the Taxpayer Relief Act of 2012, is an election made by a personal representative of an estate to transfer any unused estate tax exclusion, referred to as the “Deceased Spousal Unused Exclusion Amount,” or “DSUE”, from the deceased spouse to their surviving spouse. The election is made automatically on a timely filed, complete and properly prepared Federal Form 706 – United States Estate (and Generation-Skipping Transfer) Tax Return. The portability election can be made even if the deceased spouse was not required to file a Federal Form 706. Because of this, many personal representatives who would not normally need to file a Federal Form 706 are left with an important question – should they or shouldn’t they file a Federal Form 706 for the purpose of electing portability? In order to answer this question, the personal representative should consider the potential future benefits, rules and costs associated with filing a Federal Form 706 to make the portability election.
What to Consider
For 2016, the Federal estate tax lifetime exclusion is $5.45 million, which is subject to inflation in future years. If the surviving spouse’s assets are already over the federal estate tax lifetime exclusion amount, then making the portability election is most likely an easy decision. But what if the surviving spouse’s assets are currently below their federal estate tax exclusion amount? Could it be possible that the surviving spouse’s assets appreciate in the future to a level where they would be taxable for federal estate tax purposes? Perhaps they are a named beneficiary in another individual’s estate planning document and could potentially inherit significant assets. What if Congress decides to abolish or reduce the current federal estate tax exemption? Could the surviving spouse be included in a future settlement that would yield a significant payout? At the end of the day, any number of events could potentially cause the surviving spouse to be subject to federal estate tax at their death.
On the other hand, if the portability filing is made, the estate will have to incur the expense and effort of having Federal Form 706 prepared when it otherwise wouldn’t have been required. Fortunately, the IRS has provided simplified reporting requirements for returns filed solely for portability purposes that include assets transferring to a surviving spouse or charity. In addition, returns filed for portability purposes are not subject to the new 8972 basis consistency reporting requirements that an estate over the exemption amount would generally be subject to.
Another item that should be considered is the possibility that the surviving spouse could remarry. There are certain rules surrounding the treatment of the transferred DSUE amount when a surviving spouse remarries. If this is the case, you should discuss those rules with a qualified estate planning attorney or certified public accountant prior to making the election. In addition, the election is not available if the surviving spouse is a non-resident of the United States.
The Final Word
Ultimately, the personal representative will need to consider the risk of paying a fee now versus the potential of the surviving spouse having to pay estate tax at their death. This decision should not be taken lightly and should be thoroughly considered and discussed with a qualified estate planning professional. In addition to the items noted in this article, there may be other considerations which the personal representative must also consider. If you have further questions or would like to discuss how the portability rules could affect you, please contact our offices and we would be happy to meet with you to discuss the portability rules in more detail.
Derek is a manager on our tax team and member of the Firm’s Family Wealth team.. He specializes in assisting individual and corporate fiduciaries with complex trust/estate tax and compliance related issues. In addition, he excels in providing individuals and business owners with sound tax and business planning, taking into consideration their unique concerns and issues.