Executors Must Begin to Make Portability Elections for Estates of Decedent’s Dying after 2010

The IRS has released a Notice reminding executors of estates of decedent’s dying after 2010 that they must file and make an election on Form 706, U.S. Estate Tax Return, in order to preserve a deceased spouse’s unused estate and gift tax exclusion amount for the surviving spouse.  Estate tax returns making this newly offered and irrevocable portability election must be filed nine months after the decedent’s date of death, and the first estate tax returns electing portability for estates of those dying after 2010 are due on October 3, 2011.

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IR 2011-97, Notice 2011-82, 2011-42 IRB

What is the Portability Election?  The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Relief Act”) permits a surviving spouse an irrevocable “portability” election to carry over the unused estate and gift tax exemption of their deceased spouse dying after 2011 or 2012.  If the portability election is made, each surviving spouse is allowed their own personal $5 million exclusion (less any lifetime allocations of their $5 million exclusion) plus any remaining unused exclusion amount carried over from their deceased spouse.  IRC Section 2010(c)(2).  Then, during the lifetime of the surviving spouse, he or she may use the combined total exclusion for gifts made during life and taxable transfers made after death.

If a surviving spouse who has elected to transfer the deceased spouse’s unused exclusion amount remarries another who also predeceases the surviving spouse, the amount of unused exclusion that is available for use by the still-surviving spouse is the unused exclusion of the most recently deceased spouse, regardless of which deceased spouse’s unused exclusion amount was higher.

Making the Portability Election.  The portability election must be made by the deceased spouse’s executor on a properly and timely filed Form 706 (including extensions) regardless of whether the value of the gross estate of the decedent is large enough to cause an estate tax liability.  If an executor does not wish to make the portability election, he or she can either not file a Form 706 or, if the estate requires the filing of an estate tax return, the executor is given instructions on the proper procedure for preparing the Form 706 without making the portability election.  Be warned however, the portability election is made, the IRS may examine, and re-determine, the asset values used to calculate the unused exclusion amount up until the date of the surviving spouse’s death (which could be many years later), significantly different than the traditional, three-year statute of limitations.