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Married couples must file estate tax return to take advantage of “portability”

Under the American Taxpayer Relief Tax Act of 2012, passed by Congress in the eleventh hour, an important but not well known provision allows married couples to take advantage of one another’s leftover estate tax exemption. This is an important thing to know, because while estate tax “portability” is available to all, it is only available if it is claimed in a timely manner.

As our readers know, each taxpayer has a lifetime gift and estate tax exemption amount of $5.25 million, in addition to the annual gift tax exclusion amount of $14,000 and other unlimited deductions. As in many areas of tax law, married couples have an advantage when it comes to the gift-estate tax. Because of portability, spouses have a combined gift-estate tax exemption allowance of $10.5 million.

Before portability, special trusts were established to make maximum use of the gift-estate tax exemption amount. Portability makes things a bit simpler. But to make use of portability, one has to elect it on an estate tax return. This is the case even if no tax is due on the deceased spouse’s estate. The return must be filed within nine months of the death of the spouse, though a six-month extension is available.

Unfortunately, because portability isn’t as well known as it should be, some people will fail to elect it in a timely manner, either because they were unaware of it or because it isn’t likely that the deceased spouse’s estate will ever be worth more than $5.25 million. The safest bet for married couples who are aware of the tax break, though, is to file an estate tax return anyway, even if they don’t think they’ll need it. Doing so will allow them to take advantage of it in the event that they need to.

Source: Forbes, “The Deadline Every Married Person (And Financial Advisor) Needs To Know About,” Deborah Jacobs, January 17, 2013