In June, the IRS issued guidance that provides a simplified method for obtaining an extension of time for certain estates to make a portability election. This may be an opportunity for executors of estates who may not have been aware of the advantages of portability and think they’ve missed their chance to make this election.
Every taxpayer has a lifetime basic exclusion amount under current law, which is the amount of assets that can be transferred free of federal gift and estate taxes. As of 2011, a portability election can be made by the executor of the decedent’s estate that would transfer any of the deceased’s unused exclusion amount—called the deceased spousal unused exclusion (DSUE)—to the surviving spouse. This DSUE can be used in addition to the surviving spouse’s basic exclusion amount during life and at death. The ability to transfer the unused exclusion amount is known as portability. The following chart details the lifetime exclusion amounts from 2011 to 2017:
Here’s an example of how portability might benefit a surviving spouse: the husband dies in 2013, having no taxable gifts and leaving a $3.25 million estate. Although an estate that size doesn’t meet the threshold for mandatory estate tax return filing, the husband’s estate files an estate tax return, which permits the wife to use the husband’s DSUE. As of the husband’s death, the wife hadn’t made any taxable gifts. Thereafter, the wife doesn’t have to pay gift or estate taxes on the first $7.25 million of her assets—her $5.25 million basic exclusion amount plus a $2 million DSUE amount from the husband—which she may use for lifetime gifts or for transfers at death.
Estate tax returns are due nine months from the date of death; however, a six-month extension is available, if requested by the original due date of the return. This extension extends the due date to file, but doesn’t extend the due date for payments of estate tax liability. Prior to the guidance, an executor would’ve had to request a private letter ruling (PLR) with the IRS and pay a user fee if an executor wanted to file an estate tax return for portability after the return due date.
Revenue Procedure 2017-34, which is effective as of June 9, 2017, eliminates the need for IRS approval and the user fee if all the following requirements are met:
- The decedent must be survived by spouse, have died after December 31, 2010, and been a U.S. citizen
- The executor must not have been required to file an estate tax return (other than to elect portability)
- An estate tax return must not have been filed before the due date of the return
- The executor must include the following statement at the top of the estate tax return, Form 706: “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).”
The simplified method for estates to qualify for relief to file an estate tax return only is available if filed on or before the later of January 2, 2018, or two years from the date of death. Beyond these dates, portability won’t be available unless the taxpayer is successful in obtaining a favorable PLR from the IRS.
If a surviving spouse—or his or her estate—has overpaid gift or estate taxes prior to the portability election being made under this revenue procedure, a protective claim for credit or refund should be considered to request a refund for the overpayment. Executors of estates for decedents with dates of death in 2011 through 2016 should quickly act to determine whether an estate tax return should be filed to capture portability and avoid missing the January 2, 2018, deadline. Contact Lindsay or consult with your trusted BKD tax advisor for more information on this opportunity.