Practitioners with estate clients should be aware that the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
included a portability provision for the applicable exclusion amount ($5 million, indexed for inflation). The American Taxpayer Relief Act of 2012
included a permanent extension of portability.
Portability prevents families from incurring estate and gift taxes that could have been avoided with proper estate planning. Under the portability provision, if a spouse dies and all of his or her $5 million exclusion is not applied toward the exemption, any unused portion can be added to the applicable exclusion amount of the surviving spouse.
To take advantage of portability, however, the unused portion must be transferred from the estate of the deceased spouse to the surviving spouse. This can only be done by timely filing an estate tax return (Form 706), even if no tax is due (IRC Sec. 2010(c)(5)). If a timely return is not filed, any excess exclusion amount is lost forever and is unavailable at the death of the surviving spouse.