Portability Clarifications Highlight Potential Problems

Clarifications provided by the IRS regarding provisions of the estate tax that affect people who die in 2011 and 2012 have highlighted potential problems with the new rules. Under the new rules, the executor of the estate must file an estate tax return within nine months after the decedent’s death to preserve any unused exemption (a six month filing extension is available).

One potential problem with the new rules is the fact that most executors do not file a federal return if the exemption amount exceeds the value of the estate. The new rules require even small estates to file a tax return and pay professional fees for any needed appraisals.

Another potential problem could arise if a spiteful child-executor purposefully fails to file federal taxes to prevent a step-mother or step-siblings from benefiting from the deceased parent’s unused exemption.

The most looming problem, however, is that the current portable exemption expires at the end of 2012. One tax experts opines that the $5 million exemption will not decrease, but that the estate tax may be completely repealed in 2013.

See Laura Saunders, IRS Clarifies Estate Rules, The Wall Street Journal, Oct. 8, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.