Under a new IRS rule, if one spouse died in 2011 or later, the surviving spouse has until January 2, 2018 (or the second anniversary of the death if that’s later) to make a “portability” election, which allows him/her to add the unused part of the deceased spouse’s federal estate tax exemption to his/her own exemption. Previously, the election had to be made within a few months after the death, and many surviving spouses missed this deadline. The federal estate-tax exemption for an individual this year is $5.49 million. For more information: Search for “estate tax portability” at IRS.gov.
Keep in mind that the portability election could be useful even if your estate is much smaller than the current individual exemption. That’s because a future Congress could conceivably lower the exemption, which was $1 million for several years in the past. The estate tax rate for amounts above the exemption is currently 40%.
Example of how a portability election works: Say a husband died in 2011 and left his entire estate worth $4 million to his wife. Because the assets that are left to a surviving spouse are not subject to federal estate tax, the wife didn’t need to, and didn’t bother to, file an estate tax return. Since then, the estate has grown to a value of $7 million. If the wife (or the executor of the deceased’s estate) now elects portability and she dies in 2017, the amount of her estate that is exempt from the federal estate tax increases from her $5.49 million individual exemption to as much as $10.49 million (a combination of the wife’s $5.49 million exemption for 2017 and the husband’s $5 million exemption that was in effect in 2011). A variation on this scenario: If the husband left some of his estate—say $2 million—to beneficiaries other than his wife, then the amount of his individual exemption transferred to his wife under the portability election would be $2 million lower, or $3 million, for a total exemption up to $8.49 million for the wife’s estate if she dies in 2017.
To ensure that you elect portability properly, your accountant needs to follow specific procedures: If you didn’t file an estate tax return, you must do that now even if there are no estate taxes to be paid. File Form 706 for your spouse’s estate (available from IRS.gov). Write the following at the top of the form: Filed Pursuant to IRS Revenue Procedure 2017-34 To Elect Portability Under Section 2010 (c)(5)(A). Send the form by certified mail, return receipt requested, and keep a copy in your files. (Of course, it’s always best to check with a qualified adviser about the best course to take for your individual situation.)