There has been a lot of talk recently about “portability,” that is the ability for one spouse to leave their unused lifetime exemption to their surviving spouse upon their death. Portability is included in Senator Baucus’s tax bill. For more on the subject see the link above at Greg Herman-Giddens’s North Carolina Estate Planning Blog.
The question that I haven’t really seen answered is “How will it work?” Greg wrote in his blog that
A change that will require modifications to most large estate plans is the proposal to pass “marital deduction portability.” If a surviving spouse passes away with an estate larger than the applicable exemption, he or she will be able to use the “aggregate deceased spousal unused exclusion amount.”
In order to use a portion of the first decedent spouse’s exclusion, his or her executor must make an election on that estate tax return. If the “Spousal Unused Exclusion” election is made, the surviving spouse may then use the remaining unused exemption.
If this bill becomes law, the full estate could be transferred to surviving spouse and he or she will have an estate exemption of $7 million.
Does this mean that everyone will have to file a Form 706 Estate Tax Return?
Let’s say H and W each own $2 mil in assets and the exemption is $3.5. H dies. I understand that the concept of portability says that H can leave W the remaining $1.5 exemption. But to use it, will H have to file a 706 to lock it in even though he doesn’t have a taxable estate? Will attorneys now be required to advise everyone, no matter how small their estate is to file an Estate Tax Return? Will it be malpractice if they don’t? I can see all sorts of scenarios in which there was no return filed on the first death because the attorney did not think the surviving spouse would need the extra exemption, and then the attorney turned out to be wrong. While it doesn’t seem like it these days, assets can still appreciate it value.
I can see portability being both an administrative nightmare and a huge revenue generator for estate planning attorneys.