On April 20, 2016, House Ways and Means Committee Ranking Member Sander Levin (D-MI) introduced legislation that he said would bring fairness to the tax code by restoring the estate tax and gift tax to the more sensible levels that were in effect in 2009. While it is hard to know at this time what the fate of this bill will be, this proposal points to the importance of tax preparers and estate planners’ carefully evaluating the need to file a 706 to make the deceased spousal unused exclusion election (portability election).
Currently, estates valued at or below $5.45 million ($10.9 million for a couple) are exempt from owing any estate tax. H.R. 4996, the Sensible Estate Tax Act of 2016, would return the exemption to 2009 levels, lowering the estate tax exemption to $3.5 million ($7 million jointly) and increasing the maximum tax rate to 45 percent. The bill would retain the annual $14,000 gift tax exclusion and unlimited spousal portability but would also reinstate the $1 million lifetime gift exemption.
For the surviving spouse or his or her estate to use the deceased spouse’s unused exclusion amount, the predeceased spouse's estate must make an election – referred to as the portability election – on a timely filed estate tax return (Form 706) that includes a computation of the unused exclusion amount. To make the portability election, Form 706 must be filed even if the value of the gross estate is not enough to otherwise require filing an estate tax return. See regulations § 20.2010-2 for detailed rules and guidance on the portability election.
CAUTION – There could be serious financial repercussions for not filing the portability election. Where a surviving spouse’s estate is expected to be valued at less than the estate tax exclusion amount when he or she passes, it may seem to be a waste of time, effort and money to file a 706 Estate Tax Return for the pre-deceased spouse. However, in making that decision, one should consider the possibilities that the surviving spouse will receive inheritances or win the lotto or that Congress will reduce the estate tax exemption some time in the future. Any of these potential events could result in substantial estate tax. Who will get the blame? You, the tax preparer, of course! If the executor refuses to file the 706, then get a signed statement to that effect.