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Thursday, December 1, 2011

The Coming Flood of Estate Tax Returns

IRS LogoRoberton Williams (Tax Policy Center), The Coming Flood of Estate Tax Returns:

Fewer than 3,300 estates will owe federal estate tax this year, the smallest number in more than 75 years (other than 2010 when the tax disappeared for the year). But, paradoxically, even as Congress shrinks the number of taxable estates, the law also encourages many more estates to file returns—even if they owe no tax. That will increase costs to those who want to do prudent estate planning, keep their planners and lawyers busy, and swamp the IRS with many times the number of returns filed in recent years.

The reason: the portability provision in the 2010 Tax Relief Unemployment Insurance Reauthorization and Job Creation Act that allows surviving spouses to claim on their own estate tax returns any exemption not used by their spouses. The 2011 exemption is $5 million. If a husband dies this year and leaves an estate with a taxable value of $3 million, his estate owes no tax and his wife’s estate may claim the unused $2 million exemption when she dies. Thus, if the $5 million exemption remains in effect, her estate could avoid tax on its first $7 million.

Portability—that is, retaining that unused exemption—has its price, though: A surviving spouse must file an estate tax return that specifically provides for portability on time, whether or not the estate owes any tax. Otherwise, the extra exemption is lost forever. (And, curiously, the decedent or the executor may specifically deny portability on the return, thus making it unavailable to the surviving spouse.) ...

I suspect that estate tax attorneys are hard at work, explaining to their clients the benefit to filing an estate tax return even if the law doesn’t require one. The nine-months-after-death deadline for filing returns has already expired for people who died early this year and more estates miss the deadline each day.

How many and by how much surviving spouses will benefit from portability is uncertain. What is sure, however, is that the IRS will have to process a lot more returns and attorneys will have a lot more business preparing them.

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Comments

Well, not so fast. The portability election is to be made on a "timely filed" estate tax return. Statutorily, a timely filed return only has meaning if an estate tax return is required to be filed. By statute, an estate tax return is only required to be filed if the estate is over the exemption level. So, timely filing has no meaning if the estate is less than the exemption level. So, by statute, the decision on portability can be made at the time of death of the surviving spouse (if the surviving spouse dies before 2013). This is the argument that can be made if no estate tax return is filed in the first spouse's estate. Now, in reality, an estate tax return should be filed in every estate of the first spouse to die in 2011 and 2012. But, this is the fall-back argument if it wasn't filed and it turns out it should have been.

Posted by: Roger | Dec 1, 2011 5:49:26 AM