Tax-law changes that took effect in 2013 could eventually make estate planning much simpler for the 99%. But for the moment, lawyers widely disagree about how best to implement them. Many consumers who recently lost a spouse are at risk of missing out on an important tax break because they are not aware of a key deadline.

This is the landscape that has emerged since Congress made permanent a feature introduced on a trial basis for deaths after 2011. Tax geeks dubbed it “portability.” In a nutshell, portability makes it possible for widows and widowers to carry over the estate tax exemption of their deceased spouse (or most recently deceased spouse, in the case of remarriage) and add it to their own. The tax law refers to the sum available for carryover as the “deceased spousal unused exclusion,” or the DSUE amount. Think of it as the tax break that does not die with you.

At 2015 rates, this system enables married couples to transfer $5.43 million apiece ($10.86 million together) tax-free. With inflation adjustments, AllianceBernstein projects that, in 10 years, a couple will be able to pass on a combined $13.64 million—and in 20 years, $18.72 million.

Portability does not change the fact that you can give an unlimited amount to your spouse during life or through your estate plan (provided she or he is a U.S. citizen) with no tax applied—this is the unlimited marital deduction. But until portability became part of the law, without proper planning, when the second spouse died, anything above the exempt amount not going to charity would be taxed. In other words, the first spouse’s exemption would be lost.

To avoid that problem, you either had to leave assets to someone other than your spouse, or set up a special kind of trust and apply the tax-free amount to that trust. Often, there was a second trust, which qualified for the marital deduction, with no tax on those trust assets until the surviving spouse died. Dividing an estate into these two parts was referred to as A/B planning, and until portability, it was the most popular method for using both spouses’ exclusion amounts.

Trusts Still Have a Role
With portability, it is possible to do away with both trusts—but should you? Here is where lawyers diverge but acknowledge that one size does not fit all clients. Some favor a yet more complicated form of A/B planning that maximizes flexibility. Others would completely postpone the decision about portability until after the first spouse dies.

For example, Thomas W. Abendroth, a lawyer with Schiff Hardin in Chicago, now recommends clients set up just one trust that qualifies for the marital deduction. The executor can later apply portability to all of it, none of it, or just part of it. Meanwhile, says Abendroth, the trust can protect assets from creditors and preserve the inheritance of your children if your spouse remarries.

For couples in second marriages with children from a previous one, portability raises a separate set of issues, he adds. In this context, your DSUE is, in effect, a tax dowry—an asset that you can give to those children or to your new spouse.

Ideally, says Abendroth, it should be used to save taxes on what your children receive. It could be applied to direct gifts to them while you are alive or to an inheritance; to money you put into a trust only for their benefit; or when making gifts to a trust that benefits your new spouse first and gives your children a share only after your current spouse dies. The alternative of giving the tax dowry to your new spouse is less appealing, because it can be used to benefit that person’s family rather than your own.

Filing for Portability
Whoever is entitled to the DSUE amount, portability is not automatic. To use this valuable tax break, or “elect portability” (in legal lingo), the executor handling the estate of the spouse who died must file an estate tax return (Form 706), even if no tax is owed. This return is due nine months after death with a six-month extension allowed.

Couples need to start thinking about portability when their combined assets approach $5.43 million, says Barbara A. Sloan, a lawyer with McLaughlin & Stern in New York. Few of us can predict when we will die and how much we will be worth by then, she explains. And who knows what the future holds? Winning the lottery, inheriting a lot of money, or getting a large settlement or judgment in a lawsuit could all leave you or your spouse with much more money than you now have.

Especially in second marriages, it is a good idea to amend your estate-planning documents—for example, to indicate who will benefit from the DSUE amount and to require that your executor elect portability, Sloan says. Such wording also builds awareness of portability for people who do not know about it yet.

What if the executor does not file the return or misses the deadline? The answer depends on whether, at the time you die, your estate was required to file a return because total assets in your own name were more than the exclusion amount. If so, the DSUE will be lost. Otherwise, the executor can apply for what is called 9100 relief—a shorthand reference to Treasury regulations on how to get forgiveness for various late tax elections. Seeking mercy from the IRS can be costly, too ($9,800 just for the government filing fee).

If, like many people, you are new to this subject, the jargon-loaded, 31-page Form 706, which you can download as a fillable PDF from the Internal Revenue Service website, might be intimidating. For those filing just to elect portability, pages 17-18 of the IRS instructions can guide you through the necessary steps. They include a simplified procedure for valuing assets. (You can estimate, rounding to the nearest $250,000.) Note that there is no box to check electing portability—just filing the form is enough.

How long the paperwork takes depends, in part, on whether you have already done some of the record-keeping, perhaps to meet any state-law requirements for inventorying assets or filing a state estate tax return. Otherwise, Sloan estimates preparing Form 706 to elect portability involves about 20 to 30 hours of work from start to finish. If you hire a lawyer to do it for you with a paralegal helping and their combined hourly billing rate is $300, preparing the return would cost about $6,000 to $9,000, she estimates. But given what is at stake, whether you do it yourself or pay someone to do it for you, that could be time (or money) well spent.


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