We have frequently mentioned on this blog that during 2010 and 2011, the estate tax exemption amount is at $5 million. Under the 2010 law raising the exemption amount, individuals can transfer up to $5 million during life or at death, free of tax.
The new tax law allows for something called "portability." Portability allows widows and widowers to add any unused exclusion of their recently deceased spouse. A widow whose husband didn't use up any of his exclusion amount could, then, transfer up to $10 million free of estate tax.
To take advantage of portability, the executor of the deceased spouse would need to transfer the unused exclusion amount to the surviving spouse. The executor must fill out an estate tax return within nine months of the first spouse's death, regardless of whether any tax is owed. If no tax return is submitted, the right to portability is lost.
It is recommended that spouses file a tax return even if they currently don't have enough wealth to make use of the increase exemption from portability. If the surviving spouse somehow comes upon wealth later on and wishes to carry over any unused exemption amount, she may not do so unless a tax return has been filed.
It is important for married couples to be aware of portability and the need to file a tax return to take advantage of it. Many spouses will be too distracted by grief or the desire to save money to consider the benefits of taking time to file an estate tax return. Having an attorney is an asset in this respect, but some individuals attempt to go without an attorney to save money.
Portability also applies in the context of gifting. In our next post, we'll look at the topic of estate tax portability in that context.
Source: Forbes, "How To Use The New Tax Break For Married Couples," Deborah L. Jacobs, August 21, 2011.