Estate planning is a difficult task and you should always get legal and tax advice when making plans for your estate.  The portability provision is the allowable transfer of federal estate tax exemptions from the estate of the first spouse to die to the estate of the second spouse to die.  While the provision was set to expire as part of  the fiscal cliff in January 2013, it didn’t and there is no expiration scheduled at this time.  In fact, the administration in Washington does not seem to be focusing on the provision at all, they are attempting to decrease the limit down to $3.5 million.
A recent article from Marketwatch.com explains how to double the estate-tax exemption using the portability provision.  Currently the maximum federal estate tax exemption for people who die in 2013 is $5.25 million.  For legally married couples, the provision allows for you to pass the exemption amount for the deceased spouse on to the surviving spouse, thus allowing for a total exemption of $10.5 million when the second spouse dies.  In order to take advantage of the opportunity the surviving spouse must file IRS Form 706 within nine months of the death of the first spouse.

1. What is the portability provision

The portability provision is the allowable transfer of the federal estate-tax exemption from the estate of the first spouse to die to the estate of the second spouse to die.

This portability provision was set to expire in January of 2013 as part of the fiscal cliff. Not only did the provision not expire but there is no expiration scheduled as of this writing. I checked with Beverly Hills estate-planning attorney Randy Spiro and asked if there was anything about this provision that we should be especially attentive to.

Randy said, “Currently our administration in Washington is attempting to change the limits on the $5.25 million federal estate tax exemption to $3.5 million but interestingly enough, portability isn’t on the table.”

2. Double your federal estate-tax exemption

The maximum federal estate-tax exemption for people dying in 2013 is $5.25 million per person and that amount will continue to be indexed for inflation in 2014 and beyond.

For couples who are legally married, the federal exemption of $5.25 million may pass directly from the first-to-die to the surviving spouse, thus providing a federal exemption upon the second spouse’s death that will increase from $5.25 million to $10.5 million.

The only way this opportunity to double your estate-tax exemption can be realized is if IRS Form 706 is filed timely — that is within nine months of the first-to-die.

The surviving spouse may receive a six-month extension by filing Form 4768 — within nine months of the first spouse’s death. The extension will provide the surviving spouse with a total of 15 months to file Form 706.

3. Beware of potential complications

Estate-tax planning and the interpretation of the provisions, laws and rulings relating to it can be challenging. Just the calculation of the gross and net estate-tax liability can be complicated as it relates to your particular state’s laws on estate and inheritance as well as federal estate-tax laws.

A simple error in calculation can cost the named heirs hundreds of thousands of dollars in additional tax and the lack of awareness of the need to timely file Form 706 after the death of the first spouse can create serious repercussions for the ultimate beneficiaries.

4. Plan well

Many people don’t establish formal estate plans but create wills and trusts and assign an executor to their estate. Without a professional estate plan created by an attorney who specializes in estate tax planning, important considerations can be overlooked.

Here is an example:

The adult children of a surviving spouse who are the heirs to an estate have just been told that the federal estate tax due and immediately payable is $300,000 but could have been zero if only Form 706 had been suggested and timely filed for the first spouse to die.

Here is a simple calculation that supports the above example:

Form 706 wasn’t filed therefore there is no portability of the federal estate-tax exemption for the first spouse to die. The value of the estate on the death of the second-to-die is $6 million minus $5.25 federal estate-tax exemption = $750,000 x 40% estate tax = $300,000 federal estate tax due.

So imagine being hit with a $300,000 federal estate tax bill that could have been avoided by the timely filing of Form 706.

Many people don’t make formal estate plans and depend on their wills and executors of their estate to handle everything once they are gone.  It is always important that an attorney and tax specialists is involved so that important considerations aren’t overlooked.  It’s also important to make sure that no tax penalties are accessed due to miscalculations or misinterpretations.  

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