Filing an Estate Tax Return for a Small Estate?

For federal estate tax purposes, an estate tax return is required to be filed if the value of the estate on the date of death exceeds the exclusion amount (e.g., $5.45 million for someone dying in 2016). However, you may wish to voluntarily file an estate tax return even if the estate is worth less than the exclusion amount. Who would do this? A surviving spouse who wants to make the portability election. What is this election and what must you do to make it?

Portability election

Every person can leave up to the exclusion amount without any federal estate tax. To the extent property is left to a surviving spouse or charity, there’s an unlimited amount that is tax free. If there is a taxable amount (e.g., property passes to children) and the full exclusion is not used, the law allows a surviving spouse to use the unused amount of the deceased spouse’s exclusion amount. This is referred to as the deceased spousal unused exclusion (DSUE) amount.

For example, say one spouse dies on July 1, 2016, and leaves everything to the surviving spouse. The DSUE of $5.45 million, the amount of the deceased spouse’s exclusion amount that wasn’t used, can be used by the surviving spouse (assuming an election has been made). Say the surviving spouse dies when the exclusion amount is $6 million. The exclusion amount for the surviving spouse’s estate is $11.45 million ($5.45 million + $6 million).

Technically, the DSUE is the lesser of the basic exclusion amount or the excess of the exclusion amount of the last deceased spouse of the surviving spouse over the tentative tax of the deceased spouse. However, the DSUE cannot be taken into account unless the executor of the estate of the deceased spouse files an estate tax return on which the DSUE is computed. In effect, an election is required. It is referred to as the portability election.

Once made, the election is irrevocable. Generally, no election can be made after the estate tax return’s filing deadline (including extensions). The deadline is nine months after the date of death or the last day of the extension period if an extension has been granted.

Making the election

The portability election is made in Part 6 of Form 706. Completing the return acts as an automatic election. For a small estate not otherwise required to complete Form 706, the executor does not have to report the value of property qualifying for the marital or charitable deduction. The executor may estimate the value in good faith and with due diligence to be afforded all assets includible in the deceased spouse’s gross estate.

If the estate does not want to make the election, it can opt out by checking a box (Section A of Part 6).

The DSUE amount portable to the surviving spouse is figured in Section C of Form 706.

Late elections

The IRS can grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months unless the taxpayer is abroad).

• Regulatory election: An election whose due date is prescribed by regulation or ruling (i.e., set by the IRS)
• Statutory election: An election whose due date is prescribed by law (i.e., created by Congress)

When it comes to a portability election, it may be either a regulatory or statutory election. In the case of a deceased spouse whose estate was required to file an estate tax return, it’s statutory. For a deceased spouse with a smaller estate (no estate tax return required), it’s regulatory.

For a small estate, the IRS can grant an extension; this is a regulatory election. In one recent ruling, it gave a surviving spouse acting as executor 120 days from the due date of the ruling to timely file a return in order to make the portability election.

Conclusion

The portability election is a tool protecting family wealth. Be sure to file the estate tax return to nail it down.