“Automatic Extension for Electing Portability,” Explained

When a spouse passes away, the surviving spouse is most often left in a state of grief and overwhelming anguish. With so many different preparations and arrangements to think about, adding the stress that comes along with estate inheritance and management is not helpful to the spouse. To aid in this matter, the IRS recently released an automatic extension for surviving spouses to add their inherited estate to their own tax exemption, a process known as “electing portability.”

The portability provision is meant to protect surviving spouses from excessive taxes. It may even entitle the estate of the surviving spouse to a refund or credit.

The Breakdown
The key to understanding the Automatic Extension for Electing Portability lies in making sense of the individual words. Firstly, “automatic” is easy: something that occurs on its own or without your effort. An “extension” just gives you more time to complete the action, which you are “electing” (or, “choosing”) to have “portability” (or, “the capability of being transported”). Therefore, a surviving spouse will automatically be given more time to choose whether or not to transfer the deceased spouse’s tax exemption to his or her own. It is important to note that this applies to situations where the decedent died between December 31, 2010 and January 1, 2014, according to the IRS’s Revenue Procedure 2014-18.

So, what’s that mean?
When an individual dies, traditionally their estate has been subject to tax based upon the value of all assets owned at the date of death. This rate has historically been as high as 77%, in recent years floated around the 50% range, and now has settled in at 40%. In addition to a lower rate, the estate tax exemption has also increased in recent years. This year the estate exemption is up to $5.34 million. That means that if your estate is less than $5.34 million, you pay no tax. If you’re married and your spouse dies, any portion of the exemption that your spouse does not use can be absorbed by you, the surviving spouse. This is called “portability.” However, portability is not automatic.

What do I do?
If you want to elect portability, you’ll need to fill out Form 706, the Estate Tax Return. Due to the significant changes to the estate tax rules over the last several years, the IRS has recently ruled that if your spouse died between January 1, 2011 and December 31, 2013, you have automatically been granted an extension of time to file. That means that you can file a 706 portability election until December 31, 2014. Be careful, though, if due a refund, the refund claim may be subject to a three-year statute of limitations, which may expire before December 2014.

If you have any confusion or apprehension about the process, the qualified accountants and tax professionals at Staszak & Co. are ready to lending a helping hand.