One of the new features of the federal estate laws passed back in December 2010 is the concept of portability. Under the old law, if a husband passed away with an estate of $500,000 and the lifetime exclusion was $3.5 million (the 2009 rules), the $3 million excess that was not used at his death is forever gone.
Let's assume his wife passed away after him in the same year and she was worth $6.5 million. Under the old law, her estate could offset $3.5 million against the $6.5 million and the estate would owe tax on $3 million. Under the new law, the $3 million not used by the husband is carried over to the wife, her combined lifetime exclusion is now $6.5 million and none of her estate is taxable.
This is how the new law works; however, the estate must make an election to transfer the remaining lifetime exclusion not used to the surviving spouse. This election must be made even if there is no estate tax due. All estates are required to file an estate tax return within nine months of death or get an extension. Many estates did not make the election for deaths occurring in 2011 and there has been some concern that they were too late to make the portability election.
The IRS has just announced that estates of married individuals where the spouse died between Jan. 1, 2011, and June 30, 2011, now have an automatic 15-month period to file an estate tax return to make the portability election. This extended time is available even if the estate did not properly file for an extension of time to file.
If this applies in your case, make sure to review it with your estate tax adviser. In most cases, making the portability election is the correct thing to do; however, every situation is unique and you need to understand your options.