Click here to print "Portability of Federal Estate Tax Exclusion Between Spouses Requires Form 706"

(Published in the Idaho Business Review)

By Kimbal L. Gowland 

          As many people may have read or heard by now, the Tax Relief Act of 2010 (the “2010 Act”) provides that the federal estate tax exclusion amount for a person who passes away in 2011 or 2012 is $5 million.  One of the most significant and unique aspects of the 2010 Act is the provision on spousal “portability”, which means that a surviving spouse can take advantage of the unused exclusion amount of his or her predeceased spouse by adding the unused exclusion amount to the exclusion amount of the surviving spouse.  In plain English that means, together, a married couple can transfer up to $10 million to children and other people without federal estate taxes being imposed, making portability (if it, and the $5 million exclusion amount, were here to stay – see discussion below) a very important consideration in effective estate planning, particularly for people owning construction businesses and other small businesses.   

          To take advantage of portability, the federal estate tax laws require that the unused exclusion amount must be transferred from the estate of the first spouse to die to the surviving spouse.  This transfer can only be done by the filing of a “timely and complete” federal estate tax return (Form 706) for the first spouse to die, even if there is no federal estate tax due and even if the executor of the estate of the first spouse to die is not otherwise obligated to file a Form 706.  All of the assets owned by the decedent at his or her date of death must be properly valued and listed on Form 706. 

           If Form 706 is not filed (or is not “timely and complete”), any unused exclusion amount that could have been transferred to the surviving spouse is lost forever and will not be available at the death of the surviving spouse to reduce the amount of his or her estate that may otherwise be subject to federal estate tax.  The need to timely file Form 706 appears to be a trap for the unwary.  Often, the value of the estate of the first spouse to die will be less than the amount required to file a Form 706.  Nevertheless, the executor is required to file a timely and complete Form 706 before the decedent’s unused exclusion amount will become portable to the surviving spouse.  

          It is important to recognize that portability and the $5 million exclusion amount are, under present federal estate tax law, only scheduled to last through 2012.  For deaths occurring after December 31, 2012, unless Congress legislates otherwise before then, the exclusion amount will be reduced to $1 million, the maximum federal estate tax rate will increase to 55% from the present 35%, and portability will no longer be part of the federal estate tax law.  What happens in 2013 and thereafter in regard to the transferred portion of the unused exclusion of a first spouse who died in 2011 or 2012 is unclear, but one would assume that it would still be available (but undoubtedly in a smaller amount, if everyone’s exclusion amount is reduced from the present $5 million).  

          There will certainly be changes proposed to the federal estate tax laws before 2013.  The Obama administration has already proposed a return to 2009 levels, with a $3.5 million exclusion amount and a 45% maximum estate tax rate.  Some Republications have called for an outright repeal of the federal estate tax laws, while others in Congress have urged continuation of the $5 million exclusion amount.  Unfortunately, given the current political environment of seemingly unresolvable deadlock and the recent failures of Congress (and its “supercommittee”) in regard to the debt ceiling and deficit reduction (which political environment and failures will likely continue during the upcoming election year), we could very well return to a $1 million exclusion amount and a maximum estate tax rate of 55% (to which federal law will automatically revert as of January 1, 2013, if Congress fails to act before then).  In my opinion, the best outcome we can expect is the continuation of present law, which I hope would be made permanent (instead of for a “patchwork” two-year period, like the 2010 Act), so that people can engage in more certain estate planning. 

          Thus, although nobody knows where federal estate tax laws are headed after 2012, in the event of any death in 2011 or 2012, where a benefit could be derived from a portability election with respect to a deceased spouse’s unused exclusion amount as explained above, it is critical that serious consideration be given to the filing of Form 706 for the first spouse to die.  Form 706 is due nine (9) months after the date of death (although a decedent’s executor may request an automatic 6-month extension of the due date for Form 706). 

 Kimbal Gowland is a partner with the law firm Meuleman Mollerup LLP, representing clients with legal concerns in real property matters including purchases, sales, leasing, lending, title and development issues, general business matters, and estate planning matters.  He can be contacted at 208.342.6066 or by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  More information is available online at www.lawidaho.com.