Late Portability Election Denied for Estate That Was Over the Estate Tax Return Filing Threshold

One of the key changes of the 2010 Tax Relief Act is the addition of “portability” of the first deceased spouse’s unused basic exclusion amount, commonly referred to as the deceased spousal unused exclusion amount.  Under portability, the executor of a decedent’s estate can elect irrevocably to allow the decedent’s surviving spouse to take advantage of the unused exemption amount for the spouse’s estate and gift tax purposes.  In other words, the surviving spouse can elect to “port” or transfer the deceased spouse’s unused exemption amount to their own exemption amount so as to use both.  The goal, similar to much of estate tax planning is to fully exploit both spouse’s exemptions from the estate tax.  Indeed, the more exemptions, the less tax.

Prior to portability, the exemption amount was considered personal to the individual and therefore not transferrable to others.  Complex estate planning was often required which involved establishing credit shelter trusts in conjunction with other planning vehicles.  Accordingly, and in an effort to reduce much of the complexity associated with estate planning and to simplify the process, Congress established portability.

To elect portability, the executor of the deceased spouse’s estate must timely file a complete estate tax return (Form 706), regardless of the size of the estate.  In general, the estate tax filing requirement is based upon the size of the gross estate.  Where the decedent’s gross estate plus adjusted taxable gifts exceeds the Code’s basic exclusion amount for the year of the decedent’s death, a return is required.  For 2017, the basic exclusion amount is $5,490,000 per person.  It follows that an executor that would not otherwise be obligated to file Form 706 must still file the form within the time prescribed in order to make the portability election.  If an executor who files the Form 706 does not wish to take advantage of portability, they must affirmatively opt out by stating on the Form 706 (or in an attachment to the Form 706) that the estate is not making the election.

A complete estate tax return that is timely filed will be deemed to contain the “computation” of the unused exemption amount.  The unused exemption amount is the lesser of: (1) the basic exclusion amount in effect in the year of the deceased spouse’s death; or (2) the amount by which the deceased spouse’s applicable exclusion amount exceeds the sum of their taxable estate and adjusted taxable gifts.  Interestingly, a surviving spouse may only use their most recent deceased spouse’s unused exemption amount.  For example, suppose Wife Wilma is married to her first Husband Henry.  Husband Henry passes away.  Several years later, Wilma remarries second husband Harold.  Upon Harold’s death, Wilma may only elect portability consideration with respect to her most recent husband, Harold.  This restriction (among others) may make additional planning (such as credit shelter trusts) warranted in many cases.

For more information or if you have any questions about estate planning and taxation, please contact Judson M. Stein, Chair of the Trusts & Estates Practice Group, at 973-230-2080 or jstein@genovaburns.com or John A. Grey and Lauren M. Ahern, Associates in the Trusts & Estates Practice Group.