Married couples concerned about the estate need to understand how the final "portability election" rules may affect their existing estate plans. Recent widows and widowers also need to understand how these rules may affect their deceased spouse’s estate.

What is the "portability election" and how is the election made?

The “portability election” refers to the right of a surviving spouse to claim the unused portion of the federal estate tax exemption of their deceased spouse and add it to the balance of their own exemption. Since in 2015 the federal estate tax exemption is $5.43 million per person (the exemption changes every year since it is indexed for inflation), this means that a married couple can potentially pass on $10.68 million to their heirs free from federal estate taxes.

 To properly make the portability election, the surviving spouse must timely file a federal estate tax return, known as the “United States Estate (and Generation-Skipping Transfer) Tax Return,” or “Form 706” for short. Form 706 is due on or before nine months after the deceased spouse’s date of death, but an automatic six-month extension of time to file the return can be requested by filing an “Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes,” or Form 4768 for short, on or before the due date of the estate tax return.

Which estates are subject to the final estate tax portability rules?

The portability election first went into effect for the estates of decedents who died on or after January 1, 2011, and in response the IRS issued temporary regulations to guide taxpayers and their advisors through properly making the election. The final regulations that were released to replace the temporary regulations for the estates of decedents who die on or after June 12, 2015, while the temporary rules still apply to the estates of decedents who died on or after January 1, 2011, and before June 12, 2015.

What do the final estate tax portability rules provide?

The final rules clarify that a regulatory extension of time to make the portability election will only be granted to estates that have a gross value below the estate tax exemption in effect in the year of death. In other words, in 2022 the gross estate must be valued less than $12.06 million in order for a request for a regulatory extension to be made.

The final rules also make it clear that the administrator of the estate of a decedent who was not a U.S. citizen at the time of death may not make a portability election on behalf of the non-citizen decedent.

Unfortunately, the IRS ended up rejecting a recommendation made by the American Institute of CPAs for the creation of a shorter version of Form 706 that would be used solely for the purpose of making the portability election. The IRS cited problems it has had with other types of abbreviated forms and the difficulties and costs associated with maintaining alternate forms as the reasons for rejecting this recommendation.

How do the estate tax portability rules affect existing estate plans?

Married couples who already have an estate plan should consult with their estate planning attorney to determine if any changes need to be made to their plan in view of these final rules. Things to consider include the potential for an estate to be subject to state estate taxes, whether the portability election is a viable option in view of second or later marriages, the projected value of the couple’s estate over their life expectancies, and the loss of the step up in basis when traditional AB Trust planning is use d



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