New Portability Rules: A Cure for Incomplete State Planning

For decedents dying in 2011 and 2012, Congress provided "portability" of the unused portion of a spouse's lifetime gift and estate exclusion amount ($5.12 million in 2012), to be added to the exclusion amount of the surviving spouse. This "deceased spousal unused exclusion amount" (DSUEA) provision gives couples an additional way to preserve both spouses' full exclusions, besides traditional credit shelter and bypass trusts. * However, portability must be elected by the estate of the first spouse to die, by timely filing a properly completed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. This must be done, even though the decedent's assets are below the exclusion amount and he or she is not otherwise required to file the return.  Form 706 is normally due within nine months of the date of death, with a six-month automatic filing extension available by filing Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes. For estates of decedents dying between Jan. 1,2011, and June 30, 2011, the IRS has granted a six-month extension to file Form 706, even if the executor did not timely file a Form 4768.  Potential pitfalls of portability include that the DSUEA applies only to the most recently deceased spouse, so if a widow or widower remarries and survives the second spouse, the DSUEA of the first spouse is lost. Another planning consideration is the currently scheduled sunset of portability and the higher exclusion amount at the end of 2012. This may provide impetus for a surviving spouse to use a DSUEA in 2012 through gifting.  Many CPAs are involved in representing estates of decedents who died in 2011 and 2012. In dealing with such estates, it is important to focus on the new Code provisions allowing portability of the decedent's unused lifetime gift and estate exclusion amount to the surviving spouse. A failure to do so can result in the loss of a significant estate and gift tax benefit for the surviving spouse that could easily be overlooked. This article focuses on the new portability election and the planning opportunities and pitfalls associated with making the election and the potential consequences of failing to do so. To obtain the benefits of portability, estates must file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, even if the estate's total assets are below the $5 million (2011) or $5.12 million (2012) exclusion amount. Furthermore, the possible reduction of the federal exclusion, possibly to $1 million for decedents dying in 2013 and later, should be addressed. Executors of estates of decedents who leave a surviving spouse must be carefully counseled during the months after the decedent's death on a number of issues involving portability. THE PORTABILITY ELECTION Individual taxpayers are allowed a lifetime exclusion from federal estate and gift taxes. Congress provided for a higher federal exclusion amount in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, E L. 111-312. It also made the exclusion amount portable between spouses. These amendments, however, are to provisions of Sec. 2010 enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001, EL. 107-16 (EGTRRA), that, as of this writing, are scheduled to expire on Dec. 31, 2012. For many years, married couples have aimed through lifetime planning to ensure the effective use of each spouse's available lifetime exclusion from estate and gift tax. However, for a variety of reasons, this goal frequently has not been achieved. Portability gives clients a postmortem opportunity to maximize the use of each spouse's lifetime exclusion. LIFE PLANNING FOR SPOUSES BEFORE PORTABILITY Before the enactment of the portability provisions, spouses who both had assets exceeding the lifetime exclusion amount would typically set up a plan requiring that, on the death of the first spouse, an amount of assets equal to the exclusion amount would pass to a "credit shelter trust" or a bypass trust for the benefit of the surviving spouse. …

Field of study: Business