Estate Strategies: The New World of Portability

Should I file a Federal Estate Tax Return?

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub L No 111-312 (2010) (''2010 Tax Relief Act'') has introduced portability, which allows a surviving spouse to use a predeceased spouse's unused ''applicable exclusion'' amount (or interchangeably unused ''estate tax exemption''), into the estate tax regime.

Under Sections 302(a)(1) and 303(a) of the 2010 Tax Relief Act (Section 2010(c) of the Internal Revenue Code of 1986, as amended), any applicable exclusion amount that remains unused at the death of the first spouse (called the ''deceased spousal unused exclusion amount'' or DSUEA for short) can be used by the surviving spouse in addition to the surviving spouse's own exemption. Portability generally eliminates the need for spouses to retitle property and create trusts solely to take full advantage of each spouse's basic applicable exclusion amount.

The 2010 Tax Relief Act also increased the exemptions for estate, gift and generation-skipping transfer (''GST'') tax to $5,000,000 ($10,000,000 for a married couple for estate tax purposes under the new ''portability'' rule). Note that portability does not apply to the GST tax exemption.

DSUEA is available to a surviving spouse if the last deceased spouse died after December 31, 2010 and before January 1, 2013 (unless extended by new legislation), and if an election was made by the executor of the deceased spouse on a timely filed federal estate tax return (IRS Form 706), including extensions.

To claim the predeceased spouse's exclusion amount for the surviving spouse, the executor (personal representative) of the predeceased spouse will need to timely file an estate tax return even if the predeceased spouse's estate is not a potentially taxable estate (i.e., the value of the ''gross estate'' of the deceased spouse does not exceed the federal estate tax exemption of $5,000,000 for 2011, and $5,120,000 for 2012 (as indexed for inflation)).

Further, the estate of a decedent dying after December 31, 2010 will be considered to have made a portability election if an IRS Form 706 is timely filed, even if the election is not desired. Note that despite the IRS pronouncement that portability will not be available for late filed IRS Form 706s, it has been suggested that the IRS National Office has indicated that they will accept late IRS Form 706s that are marked ''Return filed only for Portability-Good Cause Exception under Treasury Regulation 20.6081-1c.'' An IRS Form 706 is due nine (9) months after the decedent's death. However, the personal representative may request an automatic six (6) month extension by filing an IRS Form 4768. There is no statute of limitations for the IRS to determine the amount of DSUEA. The DSUEA is lost after the death of the surviving spouse. Also, the surviving spouse must use up her own exclusion amount before the DSUEA is applied. If the surviving spouse remarries and survives a second spouse, he or she may utilize the DSUEA of the last deceased spouse only.

Many practitioners will be faced with the issue of whether they should file a Federal Estate Tax Return (IRS Form 706) for clients dying in 2011 and 2012 leaving a surviving spouse behind. Commentators have suggested that it will almost always be advisable to file a Federal Estate Tax Return for purposes of making the portability election. Some are of the belief that failing to advise your client to file the Federal Estate Tax Return and making the portability election may constitute malpractice, based upon the fact that one cannot predict what may happen between the two spouses' deaths, and that if you fail to preserve the DSUEA by making the election, the portability benefit will be lost, potentially exposing the beneficiaries of the second spouse, on his or her death, to a significant estate tax liability.

In contemplation of the portability election, consider a provision in your estate plan documents directing the personal representative to make a valid election to allow the surviving spouse to have the benefit of the DSUEA of the predeceased spouse. This election will only benefit the surviving spouse. The personal representative or beneficiaries of the deceased spouse may be reluctant to file a Federal Estate Tax Return, which is otherwise unnecessary, when the filing of the return may require the reporting of assets, the valuation of which the IRS might dispute, such as real estate or closely-held business interests. Further, personal representatives or beneficiaries may insist that the surviving spouse pay the estate to compensate for the costs associated with making the election to give the surviving spouse the benefit of the DSUEA.

For further guidance and information on portability see IRS Notice 2011-82 and consult the Instructions for IRS Form 706 (Rev. August 2011).

For more information, contact Mark E. Kellogg at Fraser Trebilcock, 124 W Allegan St., Lansing, Michigan 48933; (517) 482-5800, or e-mail him at

Published: Thu, Feb 23, 2012


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