Portability of Estate Tax Exemption

Many of you already know that under the 2010 Tax Act surviving spouses can take advantage of their deceased spouse’s unused federal estate tax exemption. What was not clear is how and when to do this. Because of the confusion the Internal Revenue Service (the “Service”) gave us some relief.

The applicable exclusion amount that remains unused as of the death of a spouse who dies after December 31, 2010 is called the deceased spouse’s unused exclusion amount or “DSUEA.” A DSUEA is available to a surviving spouse only if an election is made on the estate tax return (including extensions) of the first deceased spouse. Such election is called the “portability election.”

The Service issued Notice 2012-21 on February 17, 2012, which allows executors of certain qualifying estates an additional six months extension of time (Form 4768) to make the portability election. A “qualifying estate” is one in which (i) the decedent is survived by a spouse, (ii) the decedent’s date of death was after December 31, 2010 and before July 1, 2011, and (iii) the fair market value of the decedent’s gross estate does not exceed $5,000,000.

A qualifying estate wishing to take advantage of the extended deadline must file the Form 4768 within fifteen months of the decedent’s date of death with the notation “Notice 2012-21, Extension for Good Cause Shown” or otherwise sufficiently notifying the Service on or with the Form 4768 that the extension is being filed pursuant to Notice 2012-21.  The Notice only extends the time for filing extension form. The actual estate tax return must be filed within the 15 months from the date of death if the extension is granted.

Note: If a spouse died after December 31, 2010 and before July 1, 2011, and the fair market value of such spouse’s gross estate does not exceed $5,000,000, then your surviving spouse client may still be able to make a portability election. Remember that, unless Congress acts, portability expires at the end of this year!!!