Portability of Estate Tax Exemption

Submitted by Herm Brames on Wed, 2015-02-04 15:31

A recent article by a published tax advisor stated, “a deceased spouse’s unused estate tax exemption can be transferred to a remaining spouse by timely filing an estate tax return”. My question is: When must that estate tax return be filed to achieve that portability, at the death of the first spouse or the remaining spouse and what time limit applies?



Submitted by Ben Meyer on Sun, 2015-02-08 15:49

  • The election to transfer the deceased spouse’s unused estate tax exemption to the surviving spouse is made on federal form 706. This is called “portability”. To make the election, this form must be filed with the IRS estate tax office within nine months of the date of death of the first deceased spouse. The form needs to be filed to elect portability even if the estate of the decedent is below the threshold for federal estate tax. Currently, the federal estate tax exemption is $5.43 million in 2015, increased from $5.34 million for 2014. 
  • Therefore, portability should be elected if the total net worth of both spouses exceeds $10.8 million or so, or is expected to reach this value (as increased for inflation) by the time the surviving spouse eventually passes on, and if the applicable exemption was not totally used by the first spouse to pass away. IRA accounts are included in these limits, even if beneficiaries have been named.
  • The time for filing form 706 can be extended another six months by timely filing for an extension during the initial nine months following the death.
  • Also, a state estate tax may also apply in the event that the estate of the decedent spouse is up towards or over 7 digits, depending on the specific state where the decedent resided. Considerations of state estate tax should also be part of planning. For example, New York state has an estate tax with an exemption of $2.062 million as of April 1, 2014, generally applicable to a decedent’s estate not left to the surviving spouse. The NY threshold will rise further each year on April 1, until it matches the federal limit. But no portability applies. Other states are even lower, such as New Jersey ($675 thousand), or Maryland ($1.5 million in 2015). 

Submitted by Alan - IRA critic on Sun, 2015-02-08 16:48

Benn, why would portability not be advisable if gross estate of both spouses could be expected to exceed 5.4 mm instead of 10.8 mm?

Submitted by Ben Meyer on Sun, 2015-02-08 18:59

It would actually be a good idea in the situation you mention, assuming that the first spouse to die did not use all of the allowable federal exclusion.  If the gross estate of both spouses is betweem $5.4M and $10.8M I was thinking that the first spouse would use the entire exclusion amount, leaving the second spouse with his or her own exclusion, which should be adequate.  If the first spouse to die does not totally utilize the applicable exclusion, then portability should be elected. 

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