Why It's Important to Make the Portability Election on an Estate Tax Return (IRS Form 706)

If you're a married couple (or a surviving spouse who lost your spouse within the last few months) and you have accumulated a few million dollars in assets, then this estate tax strategy can help your family save a ton from the 40% federal estate tax.

It's called "Portability." Let's say, for example, that a married couple has $6 million in total assets. Let's keep it simple - each spouse owns $3 million. Husband dies with a $3 million estate and a $5.5 million exemption. No taxes - no problem. His estate was under the exemption amount.

But now the wife, who is in her 60's, and their kids, are wondering how to avoid estate tax when the surviving wife dies. She has her own $3m estate, and she will be getting income for her lifetime, and her assets may grow over the next 2-3 decades. 

Well, even though a federal estate tax return is not required to be filed after the husband dies, the family should seriously consider filing the return with the IRS and making the important portability election. The result for the family is the the surviving wife will not only have her own $5.5 million exemption, but her estate will also be able to utilize another $2.5 million - for a total exemption of $8 million. With her estate currently at $3 million, it would take one heckuva lot of appreciation to get to the point where the 40% estate tax would be due upon her death.

So, it's important to set up legal affairs the right way while the married couple is alive, AND handle the estate administration and estate tax filings correctly shortly after the first spouse dies.