For the first time, the estates of a married couple may benefit from “portability” of the generous federal estate tax exemptions for 2011 and 2012. In essence, the estate of a surviving spouse can inherit and use the unused portion of a deceased spouse’s exemption.
Now executors can follow new guidance from the IRS about this important estate tax break. (IRS Notice 2011-82)
Strategy: File an estate tax return for the deceased spouse, even if one isn’t required for a smaller estate.
Under the new IRS guidance, the portability election is automatically treated as being made just by filing the return, but you have to file a complete return.
This portability provision applies only to estates of decedents dying in 2011 or 2012. The IRS has reiterated that it isn’t available for pre-2011 deaths.
Here’s the whole story: A decade-long progression, which increased the federal estate tax exemption from $1 million in 2001 to $3.5 million in 2009, finally culminated with the outright repeal of the federal estate tax for 2010. Although the 2010 Tax Relief Act reinstated the estate tax, beginning in 2011, it also authorized a $5 million estate tax exemption for 2011 and 2012.
New limits in place
The IRS has just announced that inflation-adjusted exemption for 2012 is $5.12 million.
In addition, the 2010 Tax Relief Act allows portability of exemptions between spouses. Previously, an unused portion of an exemption was forfeited.
Under the new IRS notice, an estate can transfer any unused portion of the exemption for a deceased spouse to a surviving spouse by filing Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, but it doesn’t need to make an affirmative election. The estate of the spouse will be considered to have made the portability election if it files a timely Form 706.
Note that an estate of a decedent dying in 2011 with assets under $5 million would not owe any estate tax and would not usually file an estate tax return. However, these estates must now file the return to benefit from the portability provision, even if no estate tax is owed.
Normally, estate tax returns are generally due nine months after the date of death. (An executor can request a six-month extension.) Thus, this provision became effective for estate tax returns due on Oct. 3, 2011.
The 2010 Tax Relief Act also requires an estate making a portability election to compute the deceased spouse’s unused exclusion amount. However, until Form 706 is revised, the IRS says in the new notice that simply completing the estate tax return will satisfy this requirement. Finally, the IRS says it will provide more clarification about these rules in new regulations it intends to issue in the near future.
Tip: The estate tax provisions in the 2010 Tax Relief Act expire after 2012. Regardless, executors can lock in favorable treatment now for qualified estates.