In Rev. Proc. 2017-34, released in June, the IRS provides a simplified method for obtaining an extension of time to file an estate tax return to elect portability of a “deceased spousal unused exclusion” (DSUE) amount. The simplified method is available only to estates that otherwise have no filing requirement. For many eligible estates, the window for making a late portability election closes on January 2, 2018.
Estates of individuals dying after December 31, 2010, are allowed a unified credit against the estate tax that effectively reduces the value of an estate for purposes of calculating the estate tax due. It includes both the basic exclusion amount and, in the case of a surviving spouse, the DSUE amount as long as the estate of the predeceased spouse elects “portability.”
The basic exclusion amount allows an individual to transfer, during life or at death, a specific amount of assets without incurring federal estate or gift tax liability. The basic exclusion amount originally was set at $5 million for 2011 subject to inflation adjustments; for 2017, it is $5.49 million.
Electing portability permits the estate of a surviving spouse, at the time of death, to add the DSUE amount of a surviving spouse’s last deceased spouse to its basic exclusion amount. In essence, portability permits a married couple to take full advantage of each spouse’s basic exclusion amount without needing to use more complicated estate planning techniques and trusts.
For example, assume a husband died in 2011, leaving all $2 million of his assets to his wife. His estate’s basic exclusion amount is $5 million for 2011. If his estate elects portability, since his assets are going to his wife, his entire exclusion amount of $5 million (the DSUE amount) transfers to his wife. If she dies in 2017 with $7 million of assets, her estate can utilize both her basic exclusion of $5.49 million plus the $5 million DSUE transferred from the husband’s estate to avoid estate tax. Had the husband’s estate not elected portability of the DSUE amount, the wife’s estate would have had assets of $1.51 million ($7 million of assets less $5.49 million basic exclusion) subject to the 40 percent estate tax.
Problem – Missed Elections
Portability does not happen automatically. The estate of the predeceased spouse must elect portability in order to transfer a DSUE amount to the surviving spouse. And, the election must be made on the predeceased spouse’s timely filed estate tax return (Form 706). However, most estates—those with estate assets and lifetime taxable gifts equal to or less than the basic exclusion amount—are not required to file an estate tax return.
Apparently, many estates of married individuals dying after 2010 failed to file returns electing portability. As a result, the IRS has issued “numerous letter rulings” granting extensions to elect portability in situations where estates of predeceased spouses were not required to file an estate tax return.
IRS Provides Relief
The letter ruling process is expensive, both for taxpayers and the IRS. Recognizing the need for relief for estates of decedents not otherwise having a filing requirement, the IRS issued Rev. Proc. 2017-34 providing a simplified method to obtain an extension of time to elect portability (as long as certain requirements are met). The IRS made this simplified method available for all eligible estates through January 2, 2018, or the second anniversary of the decedent’s date of death, if later. Importantly, there is no IRS user fee for elections submitted under Rev. Proc. 2017-34.
The simplified method of the revenue procedure is available where:
With the window for utilizing the simplified method of Rev. Proc. 2017-34 closing for many estates on January 2, 2018, estates that meet the above requirements should immediately consider whether a portability election is desirable. The election is made by filing Form 706, United States Estate Tax Return, and stating at the top of the form: “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).”
Rev. Proc. 2017-34 provides an extension of time for an eligible estate of the first spouse to die to elect portability. It does not extend the time for the surviving spouse’s estate to claim a refund of estate tax paid with an original or supplemental estate tax return. Be sure to watch closely the time requirements for filing refund claims.