The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law on December 17, 2010, and included a key provision – providing for “portability” between spouses of the unified credit. On January 2, 2013, the American Tax Relief Act of 2012 (“ATRA”), was signed into law, including a provision making portability a permanent feature.
Generally, portability allows a surviving spouse to elect to take advantage of any unused portion of the unified credit of his or her predeceased spouse, provided that the deceased spouse died on or after January 1, 2011. Thus, a surviving spouse will be provided a larger exclusion amount to be used for his or her own gift or estate tax purposes. The portable amount that can be used by a surviving spouse is referred to as the “deceased spousal unused exclusion amount” (“DSUE amount”).
Historically, the applicable exclusion amount, or the maximum dollar amount the unified credit will allow to be transferred tax free at a decedent’s death are as follows: $5,000,000 in 2011; $5,120,000 in 2012; and $5,250,000 in 2013.
Assume for example that Jack and Jill are married. In 2011, Jack makes multiple taxable gifts in an amount equaling $3,000,000. In 2013, Jack dies having no taxable estate and is survived by Jill. Jack is considered to have used only $3,000,000 of the $5,250,000 exclusion available in 2013. Thus, Jack has $2,250,000 remaining. A timely filed estate tax return with a portability election will allow Jill to use not only her entire $5,250,000, but also the remaining $2,250,000 from Jack. Thus, Jill will be able to transfer up to $7,500,000 tax free.
One caveat of portability is that in order for a surviving spouse to use the predeceased spouse’s DSUE amount, the executor or representative of the predeceased spouse’s estate must file a federal estate tax return and affirmatively elect portability. Although estate tax returns are not required to be filed unless a decedent’s gross estate exceeds the basic exclusion amount, for decedents dying on or after January 1, 2011, an estate tax return must be timely filed, even if no estate tax is due, in order to affirmatively elect portability.
Estate tax returns generally are required to be filed within nine months after the date of a decedent’s death, unless an executor claims the available six-month extension. An estate tax return filed solely for the election of portability must meet the same filing deadline. However, there is good news for executors of the estate of decedents dying in 2011, 2012, or 2013, who were not required to file an estate tax return and who in fact did not file an estate tax return – portability may still be elected even if the deadline for filing the estate tax return has passed.
In order to file an estate tax return electing portability, an executor can file the otherwise late return with a notation at the top which provides: “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).” The deadline for filing an otherwise late return filed in this manner is December 31, 2014.