The 2010 tax law gives married couples a wonderful new tax break–with complications. Estate planning lawyers and clients are still sorting out the details, as I noted here. Meanwhile, the Internal Revenue Service extended a key deadline that some folks might otherwise miss.
This deadline applies to people who lost a spouse during the first six months of 2011. If you're not one of them, but you're currently married, please read on; the special tax break for married couples is something that we all need to understand, even though it doesn't come up until we lose a spouse.
Here's what all married couples need to know: Until the end of this year–and longer than that if Congress makes the current law permanent–we can each transfer up to $5 million tax-free during life or at death. That figure is called the basic exclusion amount. Starting in 2011, widows and widowers can add any unused exclusion of the spouse who died most recently to their own. This dramatic change currently enables them together to transfer up to $10 million (adjusted for inflation starting this year, bringing the total to $10.24 million) tax-free.
Still, portability, as tax geeks call it, is not automatic. The executor handling the estate of the spouse who died will need to transfer the unused exclusion to the survivor, who can then use it to make lifetime gifts or pass assets through his or her estate. The prerequisite is filing Form 706—the federal estate tax return–when the first spouse dies, even if no tax is owed.
Spouses should see to it that the 706 is filed even if they're not wealthy today, because who knows what the future holds? (For questions and answers on the $10 million per couple federal estate tax break, click here.)
Ordinarily, this return is due nine months after death and the executor can get a six-month extension by filing Form 4768 by then. If the executor doesn't file the return or misses the deadline, the spouse loses the right to portability.
On Friday, the IRS announced that it is extending the deadline for deaths during the first six months of 2011. They now have an extra six months to file Form 4768 — basically enabling them to get the extension retroactively if they missed the nine-month deadline. Therefore, the first estate tax returns for estates eligible to make the portability election (because the date of death is after Dec. 31, 2010) are now due on Monday, April 2, 2012–the same day that they must file Form 706.
This will be welcome news to grieving spouses who are trying to cope with the paperwork surrounding the new rules. The IRS announcement, in Notice 2012-21, will be posted today on irs.gov.