Estate Planning Series Part 2:  What is Portability for Estate Planning

Simplifying Federal Estate Tax? 

The primary motive for enacting portability of the federal estate tax exemption was simplifying estate planning for married couples.  Couples at all levels of wealth have the issue of whether to make the portability election at the death of the first spouse.  Choosing to file a federal estate tax return (Form 706) and thereby making a portability election is preferable in most cases.  Reg. 20.2020-3(a)(3).  From 706 is required to  be filed only when a decedent's estate exceeds the application exclusion, which is $11,580,000 in 2020.  But how, you ask, does that have to do with me because my assets, even added to my spouse's assets, don't even approach that.  

Estate Assets Must be Valued Anyway for Income Tax Basis. 

The assets of the decedent must be valued in any event for income tax basis purposes.  The portability regulations allow a relaxed reporting procedure, when a return is not required to be filed but is filed for the purpose of taking advantage of portability.  It is only necessary to list assets and their estimated approximate values rather than listing and supporting with appraisals, for example, the values of each of the assets.  Completing Form 706 is not overly onerous and not especially expensive.  If an estate tax return is not filed to make the portability election, a waiver letter should be signed by the executor.  The American Tax Relief Act of 2012 made portability permanent, and the 2017 Tax Cuts and Jobs Act did not disturb portability.  The law allows portability of any unused applicable exclusion amount for a surviving spouse who dies if the appropriate election is made by filing a timely federal estate tax return that computes the unused exclusion amount.  The unused exclusion amount is referred to as the deceased spouse's unused exclusion, or the "DSUE" amount.    The surviving spouse can use the DSU amount either for lifetime gifts or for estate tax purposes at the surviving spouse's death.  An individual can only use the DSUE amount from the last deceased spouse.   I recruit your CPA or tax preparer for preparation of Form 706.  

Use It or Lose It and Subsequent Marriage. 

There is a "use it or risk losing it" point here--gifts made by a surviving souse will first use the DUSE amount from the deceased spouse before using your own basic exclusion amount.  Reg. 25.2505-3(b).  If there is a subsequent marriage, the DSUE from the first deceased spouse remains available as long as the most recent spouse remains alive.  If the second spouse dies, the unused DSUE of the first spouse is lost.  

Reasons for Filing Form 706. 

Every estate of a deceased married person should consider making a portability election.  Even if the family assets are significantly below the federal estate tax filing threshold it is possible that a windfall through good fortune or inheritance could occur to increase a survivor's estate.  The survivor could remarry a wealthy person, making the DSUE of the deceased spouse a valuable asset.  Or, the survivor could sustain an injury leading to an unanticipated but significant financial recovery.  

The IRS has issued Rev. Proc 2017-34, IRB 2017-26 which provides a simplified method for estates of decedents that are not otherwise required to file Form 706 under Code Section 6018(a) to obtain an extension of time to file Form 706 and elect portability:  The taxpayer must be an executor of the estate of a decedent who was survived by a spouse who died after 2010 as a U.S. citizen or resident.  A complete and property prepared Form 706 must then be filed on or before the second anniversary of the date of death.  

Is a Simple Will the Right Tool? 

Because portability tools are now permanent, if you are married you may be inclined to proceed with a "all to spouse" will plan--the "I love you" will, relying on portability to take advantages of both spouses' estate exemptions and the potentially stepped-up income tax basis.   But is that the correct plan for you?  In the next series, we will examine whether and when a "simple will" is the best planning. 

Please contact me for review of your estate planning documents at 307.200.1914.