Robert J. Kolasa, Ltd.
Estate Planner, CPA & Former IRS Attorney
Estate Tax Portability
Save Estate Taxes through Estate Tax Portability
The "Revolution" of Estate Tax Portability
Estate tax planning was changed forever with the enactment of estate tax portability in 2011. Click "Avoiding malpractice under the new estate tax portability rules" (published article) and "Fun with Estate Tax Portability" (seminar outline) to read my recent article on this topic published by the Illinois State Bar Association in its Trusts and Estates newsletter.
Estate tax portability was created under the federal rules as a relief provision for married taxpayers not having the planning prowess to establish a credit shelter trust at the death of the first to die. Prior to the law's enactment, fundamental estate tax planning for a married couple revolved around funding the credit shelter trust of the first to die with assets equal to the federal estate tax exclusion amount. Full funding would prevent “wasting”the exclusion of the first deceased spouse, which could result in higher estate taxes.
Traditional estate tax planning was turned on its head by estate tax portability, which permits the surviving spouse to capture the estate tax exclusion of the first deceased spouse without a credit shelter trust. For example, previously it would be an estate planning mistake for a married couple worth $10 million to hold their assets in joint tenancy because with all assets going to the surviving spouse, the first to die’s federal estate exclusion would disappear without a credit shelter trust.
Under estate tax portability, such “wasted” exclusion (i.e., known as the “Deceased Spousal Unused Exclusion Amount” or“DSUE”) can now be claimed by the surviving spouse for lifetime or testamentary use. A drawback of estate tax portability is that it currently relates only to the federal estate tax exclusion and does not preserve“wasted” exclusions under the Illinois estate tax or federal generation skipping transfer tax (“GST”). For Illinois married couples whose combined assets are expected to exceed the $4 million Illinois estate tax exclusion amount, this means that in most cases proper planning still involves establishing a credit shelter trust soaking up all or a portion of the Illinois exclusion. If the credit shelter trust is funded with less than the $5.43 million federal exclusion amount, the portability election should be considered for the portion of such exclusion not utilized.
For second marriages, realize that estate tax portability is an economic asset that the parties may bargain for. Simply put, the estate of the "richer" spouse may benefit greatly by the unused DSUE of the predeceasing "poorer" spouse. In return, the poorer spouse may ask that his or her estate be reimbursed for the legal preparation costs for filing the the estate tax return (Form 706) making the portability election. Significantly, the poorer spouse may also ask that a trust be established for his or her benefit if the richer spouse dies first (this is an inducement for the poorer spouse agreeing to make the portability election if the richer spouse survives him or her). The executor making the portability election on Form 706 should consider tendering the estate tax return and asset valuations to the surviving spouse, so this information is not somehow lost if an IRS audit subsequently occurs.
Portability Election must be made on a Timely Filed Estate Tax Return (Form 706)
Robert J. Kolasa, Ltd. specializes in preparing estate tax returns (Form 706) for surviving spouses who desire to elect estate tax portability and advantage themselves of the corresponding tax benefits.
However, the surviving spouse faces strict filing deadlines for filing the Form 706 making the portability election - such return must be filed within nine (9) months of death (plus an additional 6-month period, if a valid extension is obtained).
What happens if I missed the Filing Deadline?
If somehow, the estate tax portability filing deadline is missed, all is not lost. Robert J. Kolasa, Ltd. has experience in filing IRS private letter ruling requests petitioning the IRS to waive the missed filing deadline for reasonable cause. This may cause the client to incur some attorney fees and costs in making the ruling request, but if we are successful the benefits of the portability election should more than outweigh the costs involved.