Background

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“the 2010 Tax Act”) enacted in December 2010 provides that, for 2011 and 2012 only, the estate and gift tax exemption (technically “exclusion amount”) is “portable” from a deceased spouse to a surviving spouse. In other words, the exemption not used by the deceased spouse would be available to the surviving spouse. With today’s exemption of $5 million, that would mean that a married couple could in effect use a total exemption of $10 million and could use it entirely in the estate (or by gifts) of the surviving spouse. Although portability for just two years is of limited usefulness, portability would likely not have been included in the December 2010 compromise legislation unless lawmakers anticipated that it would be made permanent, and the Obama Administration has proposed making portability permanent (although with a lower exemption of $3.5 million per spouse).

Election of Portability

Portability, of course, is subject to a number of rules. One of those rules is that portability will not be available to the surviving spouse unless the executor of the estate of the first spouse to die elects that it be available. The statute requires that the election be made on a timely filed estate tax return. The 2011 federal estate tax return (Form 706) released early this month and updated on September 28 says nothing about portability. But the accompanying instructions posted on the IRS website on September 28 state that “[t]he executor is considered to have elected to allow the surviving spouse to use the decedent’s unused exclusion amount by filing a timely and complete Form 706.” The instructions go on to identify specific ways the executor can indicate that the election is not made.

This system should work as well as can be expected when an estate tax return is required, and deeming the election to be made simply by filing a return is the right choice, as we learned from 10 years of unsatisfactory experience with an affirmative QTIP election before the form and instructions deemed the QTIP election to be made.

But that leaves open the matter of the great majority of estates for which no federal estate tax return is required, including most estates under $5 million. Those estates are most likely to need the benefit of portability, because they are the estates for which credit shelter trusts and similar techniques to preserve the predeceased spouse’s exemption are least likely to be in place, and also the estates in which the largest amount of exemption is likely to be unused and therefore available to the surviving spouse. Of course, if a couple’s combined estates are well under the exemption, there may be little reason to get involved with portability at all, although it is rarely certain that the surviving spouse will not receive a large inheritance or prize, discover a valuable asset, win the lottery, or otherwise come unexpectedly within the reach of the estate tax. Executors may decide for various reasons to forgo the portability election, but portability has no apparent downside (except perhaps in extraordinary circumstances), and it might well be made permanent.

Extending the Time to File the Estate Tax Return

Portability first applies to the estates of married persons who die in 2011. The first 2011 estate tax returns, for decedents who died January 1, 2, or 3, are due October 3 (because October 1 is a Saturday). Until there is better guidance, if no estate tax return is otherwise required, an executor may file Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, showing no tax due and stating something like “Awaiting portability guidance” as the reason for the extension of time to file.