Time Running Out on Late Portability Elections

We now have a new provision (although it has been around for a few years) that allows the unused portion of the first spouse’s estate to be “ported” over to the surviving spouse.  We call this portability.  There was a lot of confusion surrounding how to report this when the first spouse did not have a taxable estate.  The IRS had granted an automatic extension until December 31, 2014 for any estates that occurred after 2011 and before 2014 to make this late election.

Therefore, if you had an estate of the first spouse that occurred in 2012 or 2013, you have less than three months to file a form 706 to report the amount ported over to the surviving spouse.  The filing of the 706 is required even though no estate tax is owed.  Almost all farm couples with moderate amounts of farmland and other farm assets should consider making the portability election and review it with their estate tax advisor.  The cost of not making the portability election can be substantial as this example shows:

Assume Farmer Johnson passes away in 2013 and his estate had a net worth of $500,000.  His surviving spouse is also worth $500,000.  Most farmers would think that no portability election should be done since both estates are well under the $5.25 million lifetime exemption.  However, in 2014, oil and gas is discovered on their property leading to net royalty checks each month of about $200,000 to Mrs. Johnson.  Upon her death in 2020, her estate is now worth $10 million.  By then, the lifetime exemption amount has grown to $6 million, thus she is subject to a 40% estate tax on $4 million or total estate taxes of $1.6 million.  However, if they had filed the portability election back in 2014. $4.75 million of Farmer Johnson’s estate exemption would be added to her $6 million resulting in no estate tax owed.

As you can see, it is important to at least consider making the portability election even if you have a very small estate.

Paul Neiffer, CPA