Much has been written about recent legislation that provides portability between spouses of the estate and gift tax exclusion amount (for deaths in 2011 and 2012). This portability allows the unused portion of a deceased spouse’s tax exclusion amount to pass to the surviving spouse. This portability allows both spouses’ exclusion amounts to be effectively combined, thereby making full use of both exclusion amounts without requiring sophisticated estate planning.
However, this portability is NOT automatic. In other words, the surviving spouse doesn’t automatically inherit the unused portion of the exclusion amount from the deceased spouse. In fact, for this to occur, an estate tax return must be filed for the deceased spouse’s estate, even if one is not otherwise required. There are no forms to complete or boxes to check, just file the estate tax return. The IRS presumes that people will want this portability and the mere filing of the return is sufficient to make the portability election.
Financial advisors and financial planners need to be aware of this need to file an estate tax return as a means of making the portability election, especially since tax returns are not required for non-taxable estates (i.e., the very same estates where there would be unused tax exclusion and the portability would be desired).