IRS Provides Portability Relief

Since the federal estate tax was resurrected on January 1, 2011, the IRS has allowed for the concept of portability as a valuable post-mortem planning tool for married couples.  When an individual dies, his or her estate is exempt from this tax for an amount known as the “applicable exclusion amount.”  This amount is in addition to the marital and charitable deductions which are typically unlimited.  This amount is currently $5,340,000.  With proper estate planning, this amount can be doubled for a married couple.

In the past three years, however, many individuals have failed to properly protect their estates, as they have been unaware of the concept of portability.  Let’s take an example:

Ozzie died in 2011 with an estate of $4,000,000.  Harriet had $4,250,000 in assets of her own.  She inherited all of Ozzie’s assets, because he had a simple Will.  She died in 2013, leaving behind a combined estate of $8,250,000.  Based on the strict letter of the law, $5,250,000, which was the exclusion amount in 2013, will pass tax free.   The balance of $3,000,000, will be assessed a 40% tax, or $1,200,000.

There should have been no tax at all.  When Ozzie died, if the Executor of Ozzie’s estate had filed a Form 706 (the federal estate tax return), she could have claimed Ozzie’s $5,000,00 exemption (the exclusion amount in 2011) as her own (i.e. the portability of the exclusion).  If this had been done, when she died, she would have had a combined exclusion amount of $10,250,000 (his $5,000,000 added to her $5,250,000).  In that event, no tax would have been due.

In order to claim portability, a Form 706 would need to have been filed in a timely manner.  The due date is nine months after date of death.  However, many taxpayers, and unfortunately, many purported advisors, have been unaware of this provision in the law.

Fortunately, the IRS has decided to provide a limited form of relief in this area. Specifically, IRS Rev. Proc. 2014-18 allows for portability in certain cases where a Form 706 has not been filed in a timely fashion.  In order to qualify for this relief, three criteria must to be met:

  1. the first spouse to die must have passed away after December 31, 2010 but before December 31, 2013;
  2. the amount of said decedent’s estate must have been less than the exclusion amount for that year, thus making portability the only reason to file the Form 706; and
  3. the Form 706 must be filed on or before December 31, 2014.

Given that estate law frequently fluctuates, we encourage claiming the portability exemption even if it appears there may be no tax due on the death of the surviving spouse for two reasons.  Firstly, one can not be sure that the exclusion amounts will remain at their high levels. Secondly, portability allows for a step up in basis for capital assets if they are owned by the surviving spouse rather than in a disclaimer or applicable exclusion trust.  Without question, opportunity abounds this year, and competent advice should be sought as to the portability provision’s applicability to any estate that has been created in the last three years.



About the Author

Post a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.