The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 introduced a new concept known as “portability” to the American transfer tax system. Portability provides an additional layer of estate tax relief by allowing a surviving spouse to apply the unused portion of the deceased spouse’s estate tax exclusion amount to reduce his or her own estate tax liability. The concept of portability was originally intended to be temporary but was later made a permanent part of the tax code with the passage of the American Taxpayer Relief Act of 2012.
A surviving spouse does not automatically inherit a deceased spouse’s unused estate tax exemption. Portability can only be elected on a timely filed, complete and properly prepared federal estate tax return. Such return must be filed even if assets are below the filing threshold, currently $5.49 million for decedents dying in 2017. The initial filing is due nine months from the date of death but may be extended for an additional six months by filing a request no later than the original due date of the return.
Concerns have been raised that executors of estates with assets below the filing threshold may be unaware of the need to file a federal estate tax return to elect portability. The Internal Revenue Service (the “IRS”) had initially provided for a simplified method under which executors of certain estates could obtain an extension of time to make a portability election. However, this method was only available on or before December 31, 2014. After that date, if an executor inadvertently failed to make a timely portability election, the only way to request relief was to pay the applicable user fees and apply for a private letter ruling. This is a time-consuming and costly process, and favorable rulings are not guaranteed.
The volume of ruling requests and the IRS resources that have been expended to respond to such requests have prompted the IRS to revisit the issue of late portability elections. On June 9, 2017, the IRS issued Revenue Procedure 2017-34, which provides temporary relief for certain executors who missed the filing deadline and who otherwise have no estate tax filing obligations. To qualify for relief under the new guidance, an executor must file a complete and properly prepared federal estate tax return on or before the later of January 2, 2018 or the second anniversary of the decedent’s death. In addition, the words “Filed Pursuant to Rev. Proc. 2017-34 to Elect Portability Under Section 2010(c)(5)(A)” must be written at the top of the estate tax return.
Only estates with assets below the filing threshold are eligible for the above relief. If an estate is otherwise required to file an estate tax return, or if an executor files the return after the stated deadline for relief, a request for a letter ruling will be the only way to obtain an extension of time to make the portability election.
The window of opportunity to make a late election will be short-lived. Executors who may have missed the filing deadline are well advised to carefully consider making a portability election before this opportunity is lost. Even if a surviving spouse’s assets are currently insufficient to trigger estate taxes, future asset appreciation or a sudden windfall such as lottery winnings or an unexpected inheritance could quickly result in a taxable estate. Making a portability election now could result in significant tax savings for the surviving spouse’s beneficiaries. Since every estate is unique, it is important to consult with an experienced estate planning professional to determine whether a portability election is appropriate in a given situation.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.