Automatic Extension of Time for Certain Estates to Make Portability Election
Author: David Martin
On January 27, 2014, the IRS released Revenue Procedure 2014-18, which provides a simplified method to obtain an extension for certain estates to make a portability election. A portability election allows the surviving spouse to apply the decedent’s unused exclusion amount—called the deceased spousal unused exclusion (DSUE)—to the surviving spouse’s own transfers during life and at death. This means the surviving spouse can transfer more of his or her wealth without it being subject to gift and estate taxes. This procedure and the extension of time for the portability election could be beneficial to taxpayers who may think they’ve missed their chance to make this election.
As mentioned above, this extension only applies to certain estates:
- The taxpayer is the executor of the estate of a decedent who meets the following conditions:
- Has a surviving spouse
- Died after December 31, 2010, and on or before December 31, 2013
- Was a U.S. citizen or resident on the date of death
- The taxpayer is not required to file an estate tax return as determined based on the value of the gross estate and taxable gifts
- The taxpayer did not file an estate tax return within the time prescribed by Treasury Regulation Section 20.2010-2T(a)(1) for filing an estate tax return required to elect portability
- These procedural requirements are followed:
- The executor of the estate must file a complete and properly prepared Form 706 on or before December 31, 2014
- The executor must state at the top of Form 706 that the return is “Filed Pursuant to Rev. Proc. 2014-18 to Elect Portability Under Internal Revenue Code Section 2010(c)(5)(A)”
If the taxpayer already had filed an estate return during this period and did not make the portability election, this extension will not allow them to go back and make the election. This procedure is not an opportunity for a “do-over” for taxpayers that filed estate tax returns that missed making the portability election. It is, however, an opportunity for taxpayers who did not previously have a requirement to file an estate tax return to file an estate return to make the portability election.
Spouse one (S1) dies on January 1, 2011, and is survived by spouse two (S2). The assets included in S1’s gross estate amount to $2 million in joint assets with no taxable gifts made during life. An estate return is not required to be filed for S1, and no return is filed. S2 dies on January 14, 2011, and S2’s taxable estate is $8 million with no taxable gifts made during life. Due to the size of S2’s taxable estate, S2’s executor is required to file an estate tax return; the executor files a Form 706 on October 14, 2011. The estate tax return filed for S2 included a tax payment on the $3 million in excess of S2’s applicable exclusion amount.
Pursuant to this recent procedure, S1’s executor can file a Form 706 on behalf of S1’s estate during 2014 and make the portability election reporting a DSUE amount of $5 million. After S1’s Form 706 is filed for S2—or, in this case, the executor of S2’s estate—to use the DSUE and receive a refund of the estate tax paid on S2’s estate tax return, S2’s executor must file a claim for credit or refund of tax by October 14, 2014.
S2’s claim for credit or refund of tax has to be filed by October 14, 2014. To obtain a credit or refund of an overpayment of tax by reason of a portability election made pursuant to a grant of relief under the recent revenue procedure, the surviving spouse—or, in this case, the executor of the estate of the surviving spouse—must file a claim for credit or refund of tax before the expiration of the limitation period under IRC Section 6511(a). This section states a taxpayer’s claim for credit or refund of an overpayment of tax must be filed within three years from the date of filing the return or within two years from the date of payment of the tax, whichever period expires later.
This revenue procedure is an opportunity for some estates to make the portability election and take advantage of the benefits of DSUE. It is important to be proactive with this new change so that proper steps can be taken to file any applicable estate tax returns before the end of 2014.
If you have any questions or concerns, contact your BKD advisor.