Maximizing Estate Tax Exemptions for Recent Widows and Widowers

Beginning in 2011, decedents who leave their assets to their spouse can also transfer their unused estate tax exemption, commonly called “portability” under the IRS’s portability rules. The surviving spouse is eligible to receive the decedent’s unused estate tax exemption if the executor timely files an estate tax return for the decedent’s estate. Many estates, however, have failed to elect portability by filing an estate tax return because the higher exemption amount (beginning at $5 million in 2011 and indexed for inflation since) means that a federal estate tax return is not required and no taxes are due. Thus, many surviving spouses have not taken advantage of portability and presume that they will not need the higher exemption amount that results by electing portability. In January of this year, the IRS issued a temporary relief provision that allows for retroactive portability which extends to the surviving spouse another opportunity to file an estate tax return by the end of 2014 and carry over a deceased spouse’s unused estate tax exemption amount if the decedent died in 2011, 2012, or 2013. This can protect a total of over $10 million of assets from estate taxes.

Any widow(er) whose spouse died in 2011, 2012, or 2013 should consider filing an estate tax return to claim portability regardless of the size of the estate. Even though surviving spouses tend to claim they will never remarry, many do, in fact, remarry. By filing an estate tax return and preserving portability, a subsequent remarriage and eventual death of the second spouse may prevent the imposition of a 40% estate tax. Changed circumstances are not limited to remarriage. A surviving spouse may gain wealth from another source – such as an inheritance, lottery winnings, or continuing to work or invest. Furthermore, there is potential for a decedent’s unused exemption amount in any size of estate, no matter how small or large, because even a large estate can have an unused exemption amount if a substantial share of the estate is gifted to charity. Moreover, the cost of filing an estate tax return should be reasonable considering the IRS allows for simplified reporting under Treasury Regulation 20.2010-2T(a)(7)(ii) – no detailed appraisals are required and estimated values rounded to the nearest $250,000.00 are permitted.

For portability relief, Revenue Procedure 2014-18 requires:

1. The decedent must have:

  • had a surviving spouse at the time of death
  • died after December 31, 2010, and on or before December 31, 2013, and
  • been a U.S. citizen or resident at the time of death.

2. There must not have otherwise been a requirement to file an estate tax return.

3. An estate tax return cannot have already been filed.

4. Filing of a federal estate tax return by December 31, 2014, for the deceased spouse’s estate.

ESTATE TAX REFUND IF BOTH SPOUSES DIE

Note that if the surviving spouse has also died, filing for retroactive portability could result in an estate tax refund. If both spouses died in any of the years 2011-2013 and the second spouse had an estate tax liability, portability should be claimed for the first estate so that the unused exemption amount can be claimed for the second estate. For example, if husband died in 2011 and left all his assets to his wife, and his wife died in 2013 with an estate valued at $8 million, her estate is subject to a 40% federal estate tax on $2.75 million of her estate which results in an estate tax liability of over $1 million. However, if she had timely filed her late husband’s federal estate tax return, she could carry over his $5 million unused estate tax exemption amount and her estate taxes would be zero. (A claim for tax refund must be filed by three years after the return was filed or two years after the estate tax was paid, whichever is later. Also, the second spouse’s estate can file a protective claim for refund while the first decedent’s return is being filed.)

MARRIED, SAME-SEX COUPLES

Portability is also available for married, same-sex couples who (1) were legally married but (2) could not file an estate tax return to claim portability because the marriage was not recognized under federal income and estate tax law. Beginning in 2013, the IRS recognizes same-sex marriages. If the marriage was recognized under state law at the time, a surviving same-sex spouse may now file for retroactive portability. In addition, a refund claim may be filed if the first spouse owed estate taxes at death because there was no spousal deduction available at the time. Furthermore, if the second same-sex spouse has already died and owes estate taxes, a claim for refund may be filed.

Some surviving spouses may think that their low net worth means that their estate will likely not be subject to estate taxes, and that portability will be of no use, but again, this does not accommodate changed circumstances. Also, if the surviving spouse has died and the estate was subject to estate taxes – these temporary rules can provide significant relief.

Every surviving spouse who became a widow(er) during 2011-2013 should strongly consider filing a simplified Form 706 federal estate tax return by the end of 2014 to take advantage of portability.