This post should not be construed as legal advice or tax advice or marriage advice.
In June, the Internal Revenue Service (IRS) released the final regulations on the portability of a deceased spousal unused exclusion amount. To put that in simpler terms, every man, woman, and child is allowed over his/her lifetime to give assets to others without paying gift, estate, or generation-skipping taxes. This tax credit is known as a unified tax credit and for 2015, the tax credit is capped at $5.43 million and increased based on inflation each year.
Portability is a concept that allows a surviving spouse to add the unused portion of the predeceased spouse’s applicable exclusion amount to his or her own. Portability is not automatic, however. The unused portion of the deceased spouse’s Federal estate tax exemption must be preserved for the surviving spouse to use. To preserve the unused portion, the deceased spouse’s remaining applicable exclusion amount is taken on a timely filed (including extensions, if the estate is eligible to file for an extension) estate tax return (Form 706) upon which the remaining exclusion amount is calculated, and a statement is included on the face of the return being taken by the surviving spouse.
The final regulations clarify and remove many of the temporary regulations from 2011. The final regulations will cover estates for decedents dying on or after June 12, 2015 (anyone dying between on or after June 18, 2012, to June 11, 2015, would still be under the temporary regulations). The final regulations clarify that the election (properly filing a Form 706) is required within nine months after the decedent’s date of death. A six-month extension is available for those estates below the amount required to file a return in § 6018 of the IRS Code. The IRS rejected suggestions to create a simplified form for those only filing for portability due to accuracy problems with similar short forms.
A surviving spouse can lose the portability of their unused Federal tax exemption by remarrying. A surviving spouse could not remarry and utilize the predeceasing spouse’s unused federal tax exemption. The surviving spouse may potentially get portability again by surviving the new spouse, but could not bank the predeceasing spouses’ unused Federal tax exemptions. The takeaway point here is: If you remarry, then you lose any portability from your previous predeceasing spouse’s unused federal tax exemption.
Let’s look at an example of portability. Jim and Mary own a farm worth $11 million. Jim dies in 2012 and his half of the farm ($5.5 million) is passed to Mary through the unlimited spousal exemption. Mary files an estate tax return claiming the unused portion of Jim’s exclusion amount ($5.12 million). Mary passes away in 2014. Mary and Jim’s kids would inherit $10.37 million of the farm estate tax-free because Jim had $5.12 million of unused Federal estate tax exclusions in 2012 which was portable to Mary. Mary also has a $5.34 million Federal estate tax exclusion in 2014. Jim and Mary’s kids would owe Federal estate taxes of $216,000, or ($540,000 x 40%) on the remaining $540,000 of the estate.
For more information on estate planning and farm transition planning, check out the University of Maryland Extension’s Farm Estate Planning and Farm Transition website. The Department of Agricultural and Resource Economics and the Ag Law Education Initiative sponsor the site, which features Estate Planning for Farm Families (FS-972) by Wes Musser, Lori Lynch, and me.