The Estate Tax Portability and Form 706

The Estate Tax Portability Feature is Now Permanent – Should You File Form 706 Even If It Is Not Required?

One of the biggest developments in the estate and gift tax field to come out of the recent tax act (American Taxpayer Relief Tax Act Of 2012) is the permanence of the so-called “portability” provisions first established in 2010.

Portability allows a second dying spouse to use the unused estate tax exemption amount (referred to under the law as the applicable exclusion amount) of the predeceased spouse, in many cases leading to substantial estate tax savings.

Spouses have long been able to transfer unlimited assets between each other on death with the unlimited marital deduction, thereby incurring no estate tax. For example, if Joe and Jane have combined assets of $8.25 million (jointly titled as tenants by the entirety) and Joe dies, Jane will pay no estate tax because the marital assets transfer between the spouses automatically by operation of law and the unlimited marital estate tax marital deduction prevents any estate tax from being imposed. However, when Jane dies, in the absence of a portability election, her taxable estate would be approximately $3 million (assuming the combined assets do not appreciate in the surviving spouse’s estate), the amount over her individual estate tax applicable exclusion amount (currently $5.25 million).

With the availability of portability, Joe and Jane’s situation would look different. Upon Joe’s death, the assets would still transfer to Jane without estate tax because of the unlimited marital deduction. However, when Jane dies (and assuming a portability election was made on her deceased spouse’s estate tax return) she can use her husband’s unused exclusion amount, resulting in no estate tax (her exclusion (now $5.25 million) plus her deceased husband’s unused exclusion at the time of his death (also $5.25 million on these facts) will exceed the value of Jane’s estate).

In order to use the portability feature, an election must be made on the estate tax return of the first spouse to die, even if this return would not otherwise be required to be filed. Thus, estates not required to file the Form 706 because the decedent’s gross estate is below the minimum amount required for an estate tax return to be filed, nevertheless, must file a completely filled out a Form 706 and make the portability election on such return if the second spouse ever hopes to use the first spouse’s unused exclusion amount.

This sets up a cost-benefit analysis: file a full Form 706 when it is not strictly required (possibly at significant time and expense) and preserve the unused exclusion amount, or skip the filing and hope the unused exclusion amount will not be needed. If it appears possible that the second spouse will use all of his or her own applicable exclusion amount and will need the portability feature to avoid estate tax, it may be best to file a Form 706 when the first spouse dies.

This analysis can be complicated and should be undertaken only with the guidance of an experienced estate planning attorney. If you’d like to schedule an appointment, send a message through the form below or call 816-561-5000.

*This post was originally published on February 15, 2013