Portability: Maximizing the Use of Estate Tax Exemptions
by Gregory S. Dowell
An important change in the area of estate taxes occurred when “portability” elections came into play. The estate tax exclusion allows an individual to exclude a certain amount of his or her estate ($5.45 million in 2016) from federal estate taxes at death. For many years, it was necessary to plan to balance the ownership of assets between spouses so that each spouse, upon death, might take full advantage and maximize the exclusion from federal estate taxes. If the estate of a deceased spouse, through lack of planning or error, was unable to use part of the estate tax exclusion because too few assets had been transferred to the deceased spouse, there was no way to take corrective action. The surviving spouse simply would be left with a potentially taxable estate at death, solely because of the failure to balance the holdings to maximize the estate tax exclusions of the spouses.
Portability allows a taxpayer to elect to transfer at death any unused exclusion amount to the surviving spouse. The amount received by the surviving spouse is called the deceased spousal unused exclusion (“DSUE”). In this way, the estate tax exclusion that was not used by the deceased spouse became portable and was transferred to the surviving spouse for his or her use in the future. To gain this benefit, the executor of the decedent’s estate must specifically elect portability of the DSUE. If the election is made, the surviving spouse can apply the DSUE received from the estate of his or her lastdeceased spouse against any estate tax liability arising from subsequent lifetime gifts and transfers at death. Assuming the election is made, the applicable exclusion amount that remains unused as of the death of the first spouse to die is generally added to the basic exclusion amount of the surviving spouse. Again, the exclusion amount is $5.45 million for 2016. Even though the exclusion amount is adjusted annually for inflation, the DSUE amount of the deceased is determined as of the year of death of the first spouse to die, and is not adjusted for inflation that occurs after that spouse dies.
Recall the underline above regarding the last deceased spouse. For this purpose, the last deceased spouse is the most recently deceased person who was married to the surviving spouse at the time of that person’s death. The identity of the last deceased spouse is determined as of the day a taxable gift is made, or in the case of a transfer at death, the date of the surviving spouse’s death. If the surviving spouse remarries, it does not affect the designation of the last deceased spouse and does not prevent the surviving spouse from applying the DSUE amount to taxable transfers.
To elect portability of the DSUE the executor must timely file an estate tax return on form 706. The filing requirement applies to all estates of decedents choosing to elect portability, regardless of the size of the estate. As a result, an estate that would normally not have to file an estate tax return because the estate is less than the estate exclusion amount that is applicable in the year of death must file a return to elect portability. Taxpayers can also opt out of portability on a timely and completely filed estate tax return.
An outcome of portability is that estate tax returns will be filed more often (remember that portability must be elected by filing an estate tax return for the deceased), and will be filed in cases where the estate value is below the threshold that would require filing. While it will be obvious in some cases that an estate tax return should be filed, in some cases an executor will need to be aware and consider filing the estate tax return in order to elect portability, even when the return is not required to be filed. For instance, in those cases where the assets were imbalanced between the spouses, it may be prudent to file and elect portability.