The portability benefits will only be available for those dying after 2010. This benefit has not been made retroactive to the beginning of the 2010 year. Thus, for some taxpayers, holding on until after the last stanza of Auld Lang Syne is concluded could be tax advantageous. The bottom line, is that an estate of the first spouse to die must file an estate tax return, Form 706, and it must be a complete and timely return. Otherwise, portability will be lost. This will be a critical issue for many estates, especially smaller ones who do not anticipate having assets anywhere near the required $5 million threshold for filing. Further, for some decoupled states, the positions taken on the federal estate tax return will have ramifications to the state estate tax return. Complexity and more intra-family issues will abound. Caution is in order.
Section 303(a)(5) of the 2010 TRA: (5) Special Rules.-(A) Election Required.- A deceased spousal unused exclusion amount may not be taken into account by a surviving spouse under paragraph (2) unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account. Such election, once made, shall be irrevocable. No election may be made under this sub-paragraph if such return is filed after the time prescribed by law (including extensions) for filing such return. (B) Examination of Prior Returns After Expiration of Period of Limitations With Respect to Deceased Spousal Unused Exclusion Amount.-Notwithstanding any period of limitation in section 6501, after the time has expired under section 6501 within which a tax may be assessed under chapter 11 or 12 with respect to a deceased spousal unused exclusion amount, the Secretary may examine a return of the deceased spouse to make determinations with respect to such amount for purposes of carrying out this subsection.
To use the "portable" exclusion the first-to-die spouse's estate must file an estate tax return no matter how small the estate is. How many decedents' with estates that appear to be safely within the limits of the avoiding tax would willingly incur the expense and cost of filing a return? Will this become the same trap for the unwary that not having a bypass trust had been in prior years that led up to the call for portability? Will more moderate net worth, or less sophisticated taxpayers, fall into the same trap they did with bypass trusts? What about the non-ending statute of limitations for audit? Fortunately, the endless statute of limitations applies only for the purpose of determining the proper amount of the deceased spousal unused exclusion amount that ht surviving spouse can use. What kind of receipt and release would be necessary for such an executor to protect that type of decision?
Perhaps the IRS will see fit to provide a simplified estate tax filing to preserve portability, but even that will often be overlooked. For decedents residing in states with a state estate tax, a rather comprehensive return will be needed in any event, so perhaps, for those decedents, the filing will not create any significant incremental burdens. It appears not, and that a full Form 706 will be required.
Planning Note: This filing requirement provides a window into the "logic" of government tax law writers. Follow the bouncing ball: The old rules were deemed unfair. If the taxpayer didn't seek out an estate planning attorney who understood what a bypass trust was, that family would have lost out on the exclusion. That wasn't quite fair. So, let's enact a law called "portability" to obviate that unfairness. Great. Keep your eye on the ball, because this is somewhat like the three shell game on a street corner. Can you find the ball? Because the law pre-portability lead to unfair results, Congress enacted a law that requires that the probate attorney for the estate file an estate tax return to secure the benefit of the exclusion. So, if the taxpayer didn't know to hire an estate attorney to draft a bypass trust, how will his or her heirs know to hire a probate attorney to make the necessary filing? In other words, which shell is the ball under?
Once you master all of this, it might start to feel a tad like becoming the Yoda of carryover basis (since the carryover basis rules may only apply to a handful of wealthy people who died in 2010, being all-knowing about carryover basis and fifty cents will get you a cup of coffee at best). Even if you are all-knowing about the complexities of portability, the portability rule only applies during a small window of application for people dying after 2010 and before 2013, or more simply, in 2011 and 2012. Unless Congress extends the rules when we revisit this in 2013, portability will disappear from the tax law.
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