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Seize Opportunity For Portability

The Internal Revenue Service (IRS) is giving some spouses one last chance to realize the benefits of the portability provision in the federal estate tax law. Under this provision, the estate of a surviving spouse can utilize the unused portion of a deceased spouse’s estate tax exemption when the surviving spouse dies. That move could save a family hundreds of thousands or even millions of dollars in estate tax.

In a new ruling, the IRS says the portability provision election still can be made for a spouse who passed away in 2011, 2012, or 2013. But be advised that this special election is only available through December 31, 2014. So it’s strictly a use-it-or-lose-it proposition.

The portability provision, introduced by the Taxpayer Relief Act of 2010, was initially set to expire after 2012. However, the American Taxpayer Relief Act (ATRA) extended it permanently. Barring any drastic changes by Congress, you can count on portability for the foreseeable future.

Under ATRA, the federal estate tax exemption is locked in at a generous inflation-adjusted amount that is $5.34 million for 2014 (and will increase to $5.43 million in 2015). As a result, a couple can transfer more than $10 million to their heirs without paying one nickel of federal estate tax. And now the new IRS ruling effectively allows you to go back in time to capture this tax break.

Consider this simplified example: A husband owned $4 million of assets in his own name while his wife owned property worth $3.5 million. And they owned an additional $2.5 million jointly with rights of survivorship. Each spouse’s will leaves that person’s entire estate to the other spouse and then to the couple’s two children.

Suppose that the husband died in 2011 when the estate tax exemption was $5 million. Because all of his individually owned assets passed to his wife, his estate didn’t use any of his federal estate tax exemption, and his estate didn’t even file an estate tax return. So the wife now owns all of the couple’s assets.

Now assume that the wife dies late in 2014, and the $10 million of assets she had after her husband’s death has grown to $10.34 million. Although her estate can use the maximum $5.34 million exemption, that leaves $5 million still subject to estate tax. With the current top federal estate tax rate of 40%, the family would face an estate tax bill of $2 million (40% of $5 million).

But this year’s last-chance opportunity, courtesy of IRS Revenue Procedure 2014-18, enables the husband’s estate to make a retroactive portability election before the end of 2014. That would use his $5 million exemption to eliminate estate taxes on the rest of the wife’s estate, saving the family that $2 million as long as it acts before January 1, 2015.

If this new ruling affects your family, run – don’t walk – to make the necessary arrangements.


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Fly Below The Tax Radar At Year-End
Tapping Plan Early And Penalty-Free
A Social Security Benefit Calculator? It’s Not Foolproof
Should You Put A PIG In Your Pen?
Keeping A 529 Plan Rolling Along
When It Pays To ID Security Sales
Fill Up Tax Brackets To The Brim
Five Financial Vows For Newlyweds

This article was written by a professional financial journalist for Robertson, Griege & Thoele and is not intended as legal or investment advice.

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