Portability is not as well-known as other estate planning tools, like wills or trusts. But overlooking electing portability can become a costly mistake. Fortunately, there are some remedies.
Given the size of the federal estate tax exemption, it’s not unusual for most people in the middle income tax brackets to forget to make a portability election, which protects the option for the future. The IRS has wisely created a number of ways that can correct this oversight, but there are limitations. This usually occurs following the death of a spouse.
ThinkAdvisor explains the details in its article, “For Estate Planning, Don’t Overlook Late Portability Elections.” The Portability Rules let a surviving spouse make use of both his or her individual federal estate tax exemption and the exemption granted to a first-to-die spouse.
This estate tax exemption can, however, frequently result in an issue for surviving spouses, when the entire estate of the first-to-die spouse is sheltered from estate tax. A commonly overlooked key requirement for obtaining the benefits of portability, is that you must ask for it. Even when there’s no estate tax due upon the death of a first-to-die spouse, the executor of the estate must elect portability by filing an estate tax return on Form 706 within nine months of death.
If you don’t make the election, it can eventually cause the estate of the second-to-die spouse to bear the entire tax burden—especially because the surviving spouse usually inherits most of a deceased spouse’s estate. That will increase the value of his or her own estate.
Failure to elect portability is common, and it could be valuable, such as a lower estate tax exemption in future years or if the estate grows substantially in the years between the death of the first spouse and the surviving spouse.
If the estate was originally required to file an estate tax return, there are no extensions available.
Extensions might be available, according to the IRS, if there was demonstrable good cause for the failure to file the portability extension. Those include a taxpayer’s reliance on a qualified tax professional’s advice that no portability election was needed. Another is that the taxpayer was unaware of the need to make the election after exercising reasonable diligence in every other area of the estate, especially if the issues of the estate were complex and the taxpayer had little or no experience with these types of issues. Even better: discovering the error before the IRA does or relying on written guidance from the IRA are also considered good reasons.
Reference: ThinkAdvisor (April 11, 2017) “For Estate Planning, Don’t Overlook Late Portability Elections”