An important estate tax exemption portability deadline is approaching. Currently, estates valued at $5.34 million or less are exempt from the federal estate tax. The federal government taxes everything above that amount at a rate of 40 percent. Please note that additional estate taxes and tax rates imposed at the state level vary widely by state and are not part of today’s topic. The federal threshold is adjusted for inflation annually and we understand it will bump up to $5.43 million in 2015.

Portability. Under the current law, and with no significant changes expected in the immediate future, married couples may transfer an unlimited amount of property from one spouse to the other. Such transfers may take place during a spouse’s lifetime or upon a spouse’s death. The value of property transferred to anyone other than a spouse counts against the transferor’s exemption. The key point is that any unused portion of a late spouse’s exemption is currently permitted to be added to the surviving spouse’s own exemption.

An illustration might help. A and B are a married couple. In 2014, A has a $5.34 million exemption and B has a $5.34 million exemption. A dies with an estate valued at $5.34 million in 2014 leaving everything to B. A has not used any portion of A’s exemption so, if B elects to do so, B now has an exemption of $10.68 million. Because A’s exemption was portable (to A’s spouse), B’s estate may now exercise a substantially larger exemption. Now suppose A transferred $15.68 million to B. A’s exemption is still unused and still portable to B. If B elects, B can have that double exemption but in the absence of intervening factors we can guess that $5 million of B’s estate could be subject to the 40 percent federal estate tax ($2 million heading to IRS).

We keep talking about B “electing” to use A’s unused exemption. How does this work? A surviving spouse typically has nine months from the decedent’s date of death to file a federal estate tax return. It is in the estate tax return (IRS Form 706) that the surviving spouse elects portability. In our example above, if A had died on January 1, 2011 then B would normally have had until October 1, 2011 to elect portability or portability would be lost. The deadline we mentioned is a filing extension announced by IRS earlier in 2014.

IRS announced an extension for eligible estates ending December 31, 2014. To be eligible for this extended deadline, the following conditions must be met:

  1. The decedent spouse must have been a citizen of the United States;
  2. The decedent spouse must have died on, or between, January 1, 2011 and December 31, 2013;
  3. The decedent spouse must have left a surviving spouse;
  4. The taxpayer was not required to, and did not, file an estate tax return;

Although we have not fully examined all related legal issues, it seems likely to Schmidt & Lerner, LLC that married same-sex couples meeting these criteria should be eligible to take advantage of the extension as well.