This is another in a series of blogs on the basics of estate planning.

When a decedent dies, a federal estate tax return (IRS Form 706) is not required to be filed unless the decedent’s gross estate exceeds their remaining federal estate tax exclusion. In 2017, for someone who has not used any exclusion during life, this would be $5.49 million. However, this does not mean filing an estate tax return may not be the best course of action. If the decedent was married at death, their executor may wish to file a 706 to elect “portability.”

Portability is the ability for the surviving spouse to use the deceased spouse’s unused estate and gift tax exclusion after the deceased spouse’s death. Portability has been part of the law since late in 2010. Until 2012, portability was part of a law that had been set to sunset. In other words, it could not be relied upon. However, the American Taxpayer Relief Act of 2012 removed the sunset provision.

The preparation of an estate tax return often is a complex task. However, when the executor is preparing a return merely to elect portability, some shortcuts often may be available. For example, the regulations allow the value of assets going to the surviving spouse or charity to be estimated on such a return by the executor (in good faith), rather than a more formal and detailed appraisal. See Treas. Reg. § 20.2010-2. The estate tax return must be completed fully in other respects though.

The filing of the estate tax return ordinarily starts the statute of limitations running. Three years after the later of the filing of the return or its due date, the IRS ordinarily is precluded from questioning items which were established on the return. However, the IRS may examine a return, even after the expiration of the statute of limitations, to determine whether the amount of the deceased spouse’s exclusion which was ported to the surviving spouse was correct. See I.R.C. § 2010(c)(5)(B). This holds true even if the IRS had issued a “closing letter” after the filing of the deceased spouse’s estate tax return.

Thus, the filing of an estate tax return preserves the deceased spouse’s unused exclusion amount for the surviving spouse, but the IRS may always re-open the return to determine the appropriate amount of the exclusion which should have been allowed to be ported to the surviving spouse.

In my next blog, I’ll look at a few reasons why it may be better for clients to leave assets in a trust for their spouse, rather than leave the assets outright to the surviving spouse and rely on portability.

Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com