Form 706 and Instructions Provide Guidance on Portability Election

From the IRS

In October, the IRS posted Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and its final instructions. The instructions provide guidance for electing the portability of a deceased spouse’s unused estate and gift tax exclusion amount and for the executor’s use of the check box to opt out of electing portability of the unused portion of the exclusion amount.

Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312, a surviving spouse can increase his or her applicable exclusion amount by the amount of the unused exclusion amount of the deceased spouse (dying after 2010). This provision is currently scheduled to expire after 2012.

According to the instructions, the election is made by the executor of the deceased spouse’s estate. Form 706 must be filed to make the election, and even estates that would not otherwise be required to file Form 706 (generally because of the size of the estate) must file to make the election. The instructions explain that if an estate intends to elect portability, timely filing (including extensions) a complete Form 706 is all that is required. The deceased spouse’s unused exclusion must be computed on the return.

Executors of estates that are not required to file Form 706 under Sec. 6018(a) who are filing to elect portability of the deceased spouse’s unused exclusion amount to the surviving spouse are not required to report the value of certain property eligible for the marital deduction or the charitable deduction. However, the value of those assets must be estimated and included in the total value of the gross estate. For such property, the executor is permitted to estimate the value in good faith and with due diligence.

Executors who intend to elect portability should complete Section B of Part 6 of the form if any of the estate’s assets are being transferred to a qualified domestic trust, and Section C to calculate the deceased spouse’s unused exclusion. Section D must be completed by a surviving spouse if his or her spouse received an unused exclusion from one or more predeceased spouses.

Because filing Form 706 by default causes the election to be made, Form 706 and the instructions provide a mechanism for estates that are required to file, because the value of the gross estate exceeds the applicable exclusion amount or for another reason, to opt out of the election. This opt-out is made by checking the box indicated in Section A of Part 6 of the form. Executors who file Form 706 and do not wish to elect portability are told to “check the box indicated” and not to complete Sections B or C of Part 6.

If the estate is not required to file a return, not filing the form will prevent the election from being made. Only an executor who is appointed, qualified, and acting on behalf of the decedent’s estate can either make or opt out of the election.