Final Estate Tax Portability Rules and What You Need to Know

Married couples and recently widowed individuals should be aware of what 2017’s Internal Revenue Service Revenue (IRS) Procedure 2017-34 means to them. Also known as portability rules for estate taxes, this measure provides potential financial savings to surviving spouses and their heirs. While the provision is not widely known, being aware of it can prove valuable to families and heirs.

The “portability election” is the right of a surviving spouse to claim the amount of the federal estate tax exemption of the spouse who has died that was not used and combine it with their own exemption’s balance, explains a Colorado estate tax attorney. This increases the amount of tax exemption a surviving spouse may be able to pass on to heirs, due to the exemption addition.

The portability election is not automatic. The surviving spouse is required to file certain paperwork with the IRS to take advantage of the exemption. Here are more details of what to be aware of.

Estate Tax Portability Explained

Estate tax portability was first introduced in 2010, as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act. Estate tax exemption portability was made permanent when the American Taxpayer Relief Act became law in 2013.

Estate tax portability means that if one spouse dies, and the value of the estate does not require using all of that deceased spouse’s exemption for federal estate tax, then that amount that is not used may be transferred to the surviving spouse. This helps to avoid costly tax burdens once the surviving spouse passes on.

Who Qualifies for Estate Tax Portability?

Estate tax portability only applies to estates that did not have to file an estate tax return. This is because that means the estate value was below the threshold that applies to the exemption. The combined lifetime exclusion is $11.2 million today.

It’s important for taxpayers to be aware that states that have an estate tax have not adopted portability related to the state death tax exemption.

How Can the Estate Tax Portability Election Be Made?

To make the portability election, the surviving spouse is required to file a federal estate tax return in a certain amount of time. This form, the United States Estate (and Generation-Skipping Transfer) Tax Return, or Form 706, is due before or on the date of two years after the deceased spouse has died. Previously, the time limit was nine months, but the new IRS Revenue Procedure has extended the filing time period.

If the time period to file has passed, a six-month extension of time to file the return can be requested. This Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, must be filed on or before the due date of the estate tax return.

Why Is Estate Tax Portability Important?

Some spouses may be tempted to not elect for estate tax exemption portability – for example, if their net worth is far below the estate tax threshold.

However, if the surviving spouse’s income increases or the estate tax threshold drops while they are still alive, not having extra estate tax dollars eligible for exemption may result in a federal estate tax bill once the surviving spouse dies. This may place the responsibility of a costly bill on the heirs of the couple or could result in a costly lawsuit.

How to Prepare for Estate Tax Portability

To make sure you and your spouse are covered, you should consult with an estate tax attorney. As you are working on an estate plan or reviewing an existing one, it’s vital to be aware of estate tax portability so that in the unfortunate circumstance of a spousal death, the surviving spouse’s finances, and their heirs’, are protected.

Factoring in the estate tax portability when forming or amending an estate plan is important, because an estate tax attorney can help a couple maximize their exemption savings. An estate tax attorney will also be able to help a couple consider factors such as later marriages that occur after a spouse’s death and the projected value of the estate over time.

For those who have had a spouse die within the past two years and have not taken advantage of the estate tax portability which may benefit their finances, it’s also wise to consult with an attorney. When it comes to your money and how it lives on after your death, working with a professional for advice is wise.

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