ESTATE PLANNING AND THE BASICS OF PORTABILITY

Billy Thomas, CPA

The estate tax landscape has a ‘permanent’ playing field now; the current Federal legislation exists in such a way that the rules will remain consistent for the foreseeable future. Back in 2010, estate tax was in a period of uncertainty due to the expiration of the Bush-era tax rules. Then the American Taxpayer Relief Act of 2012 created permanent estate and gift transfer tax laws, thereby providing a standard, predictable set of rules for estate planning.

The American Taxpayer Relief Act made the federal estate tax exemption permanent at $5 million, indexed for inflation, which now stands at $5,340,000 for individuals who pass in 2014. A federally-taxable estate is one above the current exemption where the decedent’s gross assets exceed allowable deductions, including those assets transferring to the surviving spouse. In other words, a decedent’s estate would not pay estate tax (40%) until the estate’s net assets exceeded $5,340,000.

Portability and Estate Tax

One unique provision created out of this period of uncertainty (2011 – 2012) was the introduction of portability. This has been one of the hot topics in estate planning. The IRS has issued temporary guidance on electing portability and most recently provided official instructions simplifying the election for decedent’s estates from 2011 – 2013 (Revenue Procedure 2014-18).

Portability is an election available for the executor of a decedent’s estate to transfer the unused estate tax exemption to the surviving spouse. Before the portability mechanism was introduced, if an estate did not utilize all of the allowable estate exemption, any unused amount of exemption would be lost. Now an estate can make the portability election to transfer the deceased spouse’s unused exemption (DSUE), which can permit a revised estate tax exemption for the surviving spouse of up to $10,680,000 ($5.34 million + $5.34 million DSUE). This revised estate tax exemption allows for a significant amount of your family’s assets to transfer before paying federal estate tax.

Portability Election

In order to elect portability, a federal estate tax return must be filed in a timely manner, including extensions. A federal estate tax return is usually only required when a decedent’s gross estate exceeds the current estate tax exemption, so it is possible an estate tax return can be filed to elect portability despite the gross estate having assets under the current estate tax exemption (small estates). There are provisions permitting these small estates to file using a simplified filing method in order to make the election. In addition, the recently releasedRevenue Procedure provided some relief for estates that may not have filed timely returns in order to qualify for the portability election.

Estates of decedent’s passing in 2014, however, must still file a timely return. This election and Revenue Procedure also applies to the Windsor case and same sex spouses.

It is important to note that making this election will release the normal statute of limitations, which is historically three years. Once the election is made, the statute of limitations is unlimited. Additionally, this election only applies to the federal estate tax exemption and does not apply to the Generation-Skipping Transfer tax exemption ($5,340,000 in 2014), which is an integral part to many estate plans. Lastly, this is a federal election and would not apply at the state estate tax level unless otherwise permitted by the decedent’s domiciliary state.

Certainly, there are many complex and unique aspects to consider when deciding whether a portability election is appropriate. As always, it is best to review your current estate plan with your advisor to better understand the particular aspects of this new tool and how it may apply to your situation.

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