Estate Tax Returns Required for Portability of Unused Exemption

Significant estate tax changes were enacted at the end of 2010.  See my blog post of December 27, 2010 for more information.  One of the changes concerns "portability."  Portability enables the surviving spouse to add to his or her $5 million ($5.12 million in 2012) lifetime exemption from estate tax the amount of unused lifetime exemption belonging to his or her deceased spouse.  As enacted, portability only applies to deaths in 2011 and 2012.  For example, if the husband died in 2011 with a gross estate of $2 million, the husband's unused lifetime exemption amount would be $3 million (assuming no prior taxable gifts).  Thus, if portability is elected by the personal representative, the wife's exemption from estate tax increases from $5 million to $8 million.  If no election is made, the unused $3 million exemption is wasted.  Note that portability does not apply for generation-skipping transfer tax purposes and does not apply for deaths after 2012.

Portability must be "elected" by filing a regular estate tax return for the deceased spouse by the nine-month due date of the estate tax return.  A six month extension is available if the extension form is timely filed.  According to IRS instructions, the estate return must be completed with all required calculations, appraisals, and attachments.  Normally, an estate tax return is not required to be filed for a decedent having a gross estate under the exemption amount.  Therefore the estate's personal representative must be aware of the requirement to timely file the estate tax return (when it otherwise is not required) in order to preserve any unused lifetime exemption for the surviving spouse under the portability provisions.