Sunday, January 20, 2013
One of the best parts of the American Taxpayer Relief Tax Act of 2012 (ATRA) was that it made the portability provision permanent. According to Forbes, "Starting for deaths in 2011, and now going forward, they can carry over the estate tax exemption of the spouse who died most recently and add it their own." Under the current unified credit, this means that a married couple transfer a total $10.5 together tax-free. In addition, the portability provision has not detracted from the marital deduction, so spouses can still transfer property both during the couple's life and at death without incurring any tax. For couples wishing to take advantage of the portability provision, timing is key. The executor of the decedent's estate must file an estate tax return, even if the decedent will likely not incur an estate tax. The return will be due 9 months after the death of the decedent. There is the possibility of an extension.
The question arises as to whether a person can still transfer a portion of a deceased spouse's exemption without the taxpayer filing the necessary estate tax return because they simply forgot or their attorney was not aware of the portability option. Some experts on this claim that the taxpayer is simply out of luck because the deadline to file the estate tax return was May 1, 2012. A taxpayer could file a 9100 relief, which provides forgiveness for late elections. Unfortunately, it is expensive and basically requires that the professional adviser admit fault. This is not available for the portability election because it has a deadline and 9100 relief is not available in those instances. The only hope is that the IRS might make an exception because its the first year. For attorneys and financial advisors, mistakes like this could be problematic for a client; therefore, it is important for both to inform their clients of the changes in the law to prevent problems like the ones above.
See Deborah L. Jacobs, The Deadline Every Married Person (And Financial Advisor) Needs To Know About, Forbes, Jan. 17, 2013.
Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.