One of the most overlooked and misunderstood tax laws — available to married farming couples — is an opportunity called portability.
When one spouse dies, the surviving spouse can make a portability election. That means any unused federal gift or estate tax exemption can be transferred from the deceased spouse to the surviving spouse.
FILE A FORM 706
The surviving spouse must file a Form 706 federal estate tax return within five years of the person’s death (the deadline was recently extended from two years).
“I am shocked and disappointed by how many advisers don’t understand portability and don’t embrace it,” says Polly Dobbs, owner of Dobbs Legal Group. “It can be a multi-million-dollar mistake if it’s not elected.”
If you miss the five-year deadline, you can still elect portability, says Paul Neiffer, CPA and principal with CLA. But you will incur considerable expense in the process to obtain your own private letter ruling.
“You will pay a user fee that’s about $12,000, and then you have to pay a lawyer or adviser to prepare the paperwork, and that’s probably another $10,000 to $15,000,” he says. “But if you file it within five years of your spouse’s death you could can avoid those costs.”
In the past, it was common for husbands and wives to own similar assets, or at least the amount of assets that could fully soak up each person’s exemption, Dobbs says.
“Folks are used to seeing farms titled one-half with the husband, one-half to the wife — as tenants in common, not husband and wife jointly,” she notes. “Because in the old days, if you didn’t use the wife’s exemption to cover her assets if she died first, it would just expire and be gone.”
Now, with portability, all the assets can flow through to the surviving spouse, and that first deceased spouse’s exemption can be ported to the survivor to help shelter the assets from estate tax at the second death.
COSTS VERSUS BENEFITS
You will incur some costs in electing portability and filing a Form 706. However, it’s likely a small expense (around $2,000) compared to the dollar amount you will likely preserve.
“You’re paying $2,000 and could save up to $4.8 million in estate taxes,” Dobbs says. “That makes for a pretty easy cost-benefit analysis.”
Be sure to consider your state estate taxes, Neiffer says. There are 17 states that have estate taxes in place, and sometimes the amounts taxed can exceed federal amounts.
