Portability is an area where investors need advice

With final rules out just last month, portability is an area of tax planning in which wealthy clients need help from financial advisers. “Portability is a game-changer that has not fully seen the impact on planning,” said Dennis Belcher, a partner at McGuireWoods, at the AICPA Estate Planning Conference in Salt Lake City on Monday. The Internal Revenue Service issued rules June 12 on portability, essentially finalizing regulations on how transfers of unused estate-tax exclusions can go from the first deceased spouse to the surviving spouse. “A few things changed and there were some things that they indicated that will be changed in the future,” Mr. Belcher said. “They are basically taxpayer-friendly.” One scenario the rules clarified is that when a spouse who has received a deceased spouse's unused exclusion makes a gift, the spouse can use up the deceased spouse's exclusion first — before tapping into their own, Mr. Belcher said. For planning, that means a spouse who has a deceased spouse's applicable exclusion amount and plans to marry again should make a gift and use the exclusion, because if the spouse's next married partner dies, then he or she gets that exclusion and loses the one from the previous marriage, he said. (More: Cost of settling estates rising as states hunt for more revenue) To take advantage of the portability rule, an estate tax return must be filed when the first spouse dies, even if no tax is due. The normal filing time is within 9 months after death, with a six-month extension available. The IRS divided the deadline for electing portability into two categories in the new rules. A regulatory extension now will only be given to those estates that were not large enough to require filing an estate-tax return, or those under $5.4 million, Mr. Belcher said. (More: Best states to retire to for tax reasons) However, to get that extension, the spouse will need to get a private-letter ruling, which is a process that costs about $10,000. “We are hopeful that the IRS will make it automatic so that you won't have to go through the filing,” he said. The regulations did not address portability in the area of pre-marital requirements. Pre-nuptial negotiations increasingly involve a requirement to have a portability return filed or portability elected, but it's unclear who should have to pay for that return to be prepared.