Portability becomes permanent

This year, portability was made permanent. That means a surviving spouse may use the remaining lifetime exemption of a deceased spouse. Married couples can now protect up to $10.5 million from gift and estate tax, even if their estate plans are not updated and do not contain "credit shelter trust" provisions. Portability even applies if everything is held in joint names.

The drawback: Portability is an election. The only way to make the election is to file a federal estate tax return, Form 706, in a timely and complete manner. Even if the estate of the first spouse to die is under the exemption amount and would not otherwise bear any tax, the return must be filed to preserve the exemption. There is no shortcut. The rules require a complete return with the same detail that would be required on a return if there were a taxable estate. The IRS has issued guidance that valuations may be estimated in certain circumstances rather than requiring formal valuations. The IRS will issue a range of values in the instructions for Form 706 to provide for this slight simplification in preparing the form.

The advantage: The unused exemption amount can be used during lifetime or at death.

Example: A wife dies with an estate of $2 million, but her will anticipated her husband dying first and made specific bequests of $4 million to various nieces and nephews. Her husband feels very badly about the fact that they never transferred enough assets into her name and wants to "make good" and honor these gifts. He now can without affecting the amount of his exemption.

As executor of her estate, he would file an estate tax return to show she had a taxable estate of $2 million and that her unused exemption is $3.25 million. He can make the gifts that she had wanted to make under her will and use $2 million of her exemption to cover the gifts. He makes the election to use her unused exemption on his gift tax return. He still has his full $5.25 million of exemption, plus her remaining $1.25 million, which can be used at any time during his lifetime or at his death.

Caution: The portability election is only for gift and estate tax purposes. There is no portability of unused generation-skipping tax exemption. Portability may only apply for federal purposes. State law must be reviewed to see if the federal election applies at the state level. Portability is not a substitute for good estate planning.

Limitations of portability for generation-skipping tax and state estate tax exemptions
Limitations of portability for generation-skipping tax and state estate tax exemptions

For more information or any questions you might have about portability, please contact your Baker Tilly advisor or send an e-mail to tax@bakertilly.com.