Estate Tax Traps

Are you married?

Estates of married individuals dying after 2010 must file an estate tax return to pass along their unused estate & gift tax exclusion amount to their surviving spouse.

Available for the first time this year, the new portability election allows estates of married taxpayers to pass along the unused part of their exclusion amount, normally $5 million in 2011, to their surviving spouse. Enacted in December, 2010, this provision eliminates the need for spouses to retitle property and create trusts solely to take full advantage of each spouse’s exclusion amount.

A married couple might want to take into consideration a very important aspect of the 2010 estate tax law. Under the law, each partner’s individual estate tax exemption of $5.12 million becomes “portable,” or it allows the first partner who passes away to transfer his or her individual estate tax exemption to his or her surviving spouse.

The IRS expects that most estates of people who are married will want to make the portability election, including people who are not required to file an estate tax return for some other reason. The only way to make the election is by properly and timely filing an estate tax return on Form 706. There are no special boxes to check or statements needed to make the election.

The purpose of this provision is to ensure that the surviving spouse does not incur an estate tax on property that would normally be covered by the estate tax exemption. This provision operates with the martial estate tax exemption, which allows the first spouse to pass away to transfer his or her assets to the surviving spouse without incurring an estate tax. Because of this provision, the first spouse to pass away does not need to use the $5.12 million exemption.

However, if a couple wants to take advantage of the portability provision, the executor of the estate must file an estate tax return on the first spouse to pass away to preserve the exemption. Even if the estate is worth less than $5.12 million exemption, the executor might still want to file an estate tax return preserving the exemption just to be cautious. The surviving spouse might gain a windfall and, notwithstanding other facts, use the preserved exemption to pass that windfall to the heirs of the surviving spouse.

Speak with an estate planning attorney for help. Call Mitchell A. Port at (310) 559-5259.