The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) added a “portability feature” for estates of decedents dying after 2010 and before 2013. This allows a surviving spouse to use the deceased spouse’s unused exclusion amount in addition to their own $5 million exclusion for taxable transfers made during life or at death.
Of course, there is a catch. The IRS, in IRB 2011-42 states that if you want to utilize portability, the executor of the estate of the deceased spouse must file a timely estate tax return and make an election on the return. No election may be made if the estate tax return of the deceased spouse is filed after the due date (including extensions).
So, why is this important? Suppose husband dies in 2010 with an estate valued at $2 million and leaves everything to wife. No estate tax return is filed as there will be no tax due. Wife then dies in 2013 after the expiration of the Act and the exclusion amount is now $1 million, not $5 million. Wife’s executor will have to pay tax on $1 million as husband’s exclusion cannot be used at all. Had wife filed a timely estate tax return, she could use her husband’s exclusion as well as her own and shield the entire $2 million from estate tax! You snooze, you lose.