Currently, the value of assets passing to heirs upon the death of a U.S. citizen free of federal estate taxes, called the federal estate tax exemption amount, is $5.12 million dollars per person. This federal estate tax exemption amount is valid through the end of 2012.

In the past, upon the death of the first member of a married couple, the federal estate tax exemption of $5.12 million dollars would be applied to assets in the estate owned by that first deceased spouse in order to reduce or eliminate the estate taxes due. However, if that first spouse owned assets worth less than $5.12 million dollars, the balance of the federal estate tax exemption left over would disappear. Then, the second spouse to die could utilize his/her own $5.12 million dollar exemption amount to offset estate taxes due for his/her own estate assets, but could not access the unused portion of the federal estate tax exemption amount resulting at the death of the first spouse.

Some married couples preserved the federal estate tax exemption amount of the first spouse to die by re-titling assets and using testamentary trusts. However, there was no way to preserve the unused portion of the federal estate tax exemption amount of the first spouse to die except by utilizing these more sophisticated estate planning techniques.

Recently however, the Internal Revenue Service (IRS) issued Notice 2011-82 to alert executors of the estates of decedents dying after Dec. 31, 2010 of a new, simpler method of preserving the unused portion of the federal estate tax exemption amount of the first spouse to die. This new method involves making a “portability” election through the filing of United States Estate and Generation Skipping Transfer Tax Return, known as Form 706.

This “portability” election allows executors to pass along the unused portion of the federal estate tax exemption amount of the first spouse to die to the surviving spouse without the necessity of using sophisticated estate planning techniques to preserve the exemption amount.

In order to qualify for the “portability” election, the IRS requires that specific rules must be followed. These rules are contained within Notice 2011-82. Most importantly, to make the election, the executor must file Form 706 for the decedent’s estate on a timely basis, even if the executor would not otherwise be obligated to file Form 706. By timely filing Form 706, an estate will be considered to have made the “portability” election. No election may be made if the Form 706 is filed after the time prescribed by law (including extensions) for filing.

Although the federal estate tax exemption amount is always subject to change, and will, in fact, likely be changed this year or soon thereafter, the benefit of the “portability” election is well worth the effort required to file Form 706. Therefore, if you have been appointed the executor or administrator of an estate, you should consider electing  “portability” of the federal estate tax exemption amount by filing Form 706 on a timely basis.

The notice from the IRS is attached here – Notice 2011-82