Article Highlights:
- United States Estate Tax Return
- Portability Election
- Purpose of the Portability Election
- Qualifications for Filing a Portability Election
- Special Portability Filing Rules
- Complications Associated with Preparing Form 706
- Who Should Make a Portability Election?
- Example When Portability Election is Not Made
- Importance of Signing a Refusal Letter
In estate planning and tax management, the United States Estate (and Generation-Skipping Transfer) Tax Return, or Form 706, is a crucial document. The portability election, which permits a surviving spouse to use their deceased spouse's unused inheritance tax exclusion amount, is one of its important characteristics. This article explores the many facets of the 706 portability election, covering its goals, requirements, unique filing requirements, complexities, and the significance of making an educated choice.
The value of a decedent's estate is reported and the amount of federal estate tax owed is computed using Form 706. Additionally, the generation-skipping transfer (GST) tax is calculated using it. If the gross estate exceeds the lifetime estate tax exclusion amount after adjusted taxable gifts and certain exclusions, the form has to be submitted. This exclusion amount is $13.610 million for deaths that occur in 2024. There is a 40% top tax rate. Form 706 is normally due nine months after the decedent's date of death, however it is possible to extend the deadline by six months with an application.
Purpose of the Portability Election
By making the portability election, a surviving spouse can apply the dead spouse's unused exclusion (DSUE) amount to their own transfers made to other people during their lifetime (gifts over the yearly gift tax exclusion threshold) or at their death. In order to facilitate estate planning for married couples and guarantee that the estate tax exception is properly utilized, this provision was included by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
Qualifications for Filing a Portability Election
To be eligible for the portability election, the subsequent requirements need to be fulfilled:
- Date of Death of the Decedent: The Decedent's date of death has to be after December 31, 2010.
- Survivor Spouse: A surviving spouse is required for the deceased.
- Citizenship or Residency: At the time of death, the deceased had to be a citizen or resident of the United States.
- Estate Tax Return Requirement: Regardless of the necessity to file for portability, the estate shall not be obliged to file an estate tax return based on the value of the gross estate and adjusted taxable donations.
Special Portability Filing Rules
The "simplified method"—special filing rules—offers a way to get an extension of time to file Form 706 beyond the regular deadline if you just want to make a portability election. A completed and correctly drafted Form 706 must be filed on or before the fifth anniversary of the decedent's death under the present streamlined approach. Prior to the implementation of this special rule, in the event that no 706 was filed and the filing date had past, an application for a private letter decision allowing an extension of time to file the 706 in order to make the portability election had to be made to the IRS. Processing the request came with a hefty cost from the IRS. The streamlined approach has no user fees.
Complications Associated with Preparing Form 706
Form 706 preparation can be difficult and time-consuming. Among the difficulties are a few of the following:
- Asset Valuation: It might be difficult to determine the decedent's exact worth of their personal belongings, investments, and real estate.
- Deductions and Credits: Careful attention to detail is needed to identify and compute allocable deductions and credits, such as charity donations and married-separation deductions.
- Documentation: It might be difficult to compile and arrange the supporting documentation for the stated values and deductions.
The expense of creating a Form 706, due to its intricacy, can be high and frequently influences the decision to make the portability choice.
Who Should Make a Portability Election?
For surviving spouses who think their own estate could be larger than the lifetime exclusion level, the portability choice is very helpful. The surviving spouse can significantly raise their exclusion amount by choosing portability, which might result in estate tax savings of hundreds or even millions of dollars.
It is advisable to think about making the portability option even if the surviving spouse's inheritance is now below the exclusion level. Future variations in wealth might cause the estate to exceed the exclusion threshold, such as winning the lottery, getting a large bequest, or acquiring more assets. Furthermore, after 2025, the exclusion amount is scheduled to be roughly reduced under present law. Congress will decide whether to extend the more generous sum.
Example: When Portability Election is Not Made
Assume that John passes away in 2024 and leaves a $10 million fortune. As the executor of his estate, his wife Jane chooses not to file Form 706 to elect portability, citing the substantial difference between her assets and the $13.610 million exclusion level. But after a few years, Jane receives a $5 million inheritance from a relative, and her investments grow dramatically, increasing the value of her estate to $15 million.
Jane's estate would have a taxable estate of $1.39 million if she had not made the portability choice and the exclusion amount in her year of death had likewise been $13.610 million. Her estate would be required to pay $556,000 in estate taxes at a 40% tax rate. If she had chosen portability, she would have been able to take advantage of John's unused exclusion, which would have prevented any inheritance taxes from being due. Her descendants will wish she had run for office.
Importance of a Signing a Refusal Letter
The executor and surviving spouse may be asked to sign a rejection letter by the tax preparer if it is decided not to file for the portability election. This letter acts as proof that the tax preparer discussed the possible advantages and disadvantages of the portability election with the client. Additionally, it shields the tax preparer from any legal action in the event that estate taxes are subsequently incurred by the surviving spouse's estate and might have been prevented with the portability choice.
This firm's goal is to help you navigate the complexities of the tax code and maximize your tax benefits. If you have any questions or need assistance with your tax return, please do not hesitate to contact this office.
