Estates That Missed Deadline May Still Elect Portability– March 12, 2014 by Andy Whitehair

IRS issues new process and filing deadline

The concept of portability introduced via the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and made permanent in the American Taxpayer Relief Act (ATRA) of 2012 was a major win for taxpayers, particularly those with “smaller” estates. Portability allows the estate of a decedent who is survived by a spouse to transfer the decedent’s unused estate tax exemption to the surviving spouse.

But here’s the key:to elect portability, the executor is required to file an estate tax return within nine months of date of death (absent an extension) even if an estate tax return is not otherwise required.

Confused? You’re not alone. A combination of changing laws (some of which were applied retroactively), late issued guidance from the IRS, and the new rules of portability left many advisors and executors of estates with decedents dying after 2010 struggling to take the appropriate action. As a result, many executors may have missed the opportunity to make a portability election, thus, potentially subjecting the surviving spouse to an unnecessary estate tax liability. To correct this mistake, taxpayers previously were required to request relief via an IRS private letter ruling and to pay a user fee of $10,000.

Fortunately, in Revenue Procedure 2014-18 issued on January 27, 2014, the IRS set forth a simplified method for certain taxpayers to obtain an extension so they can make a portability election without incurring the $10,000 user fee. The decedent must fall within the guidelines below for executors to make a late portability election under this new procedure. The decedent must:

  1. have had a surviving spouse,
  2. have died anytime from January 1, 2011, through December 31, 2013,
  3. have been a citizen or resident of the United States on the date of death, and
  4. not have been required to file (or actually did file) an estate tax return, i.e., the decedent does not qualify if the executor was required to file an estate tax return and failed to do so.

Under this new ruling, taxpayers have until December 31, 2014, to prepare and file Form 706 United States Estate Tax Return to make the portability election.

How it works

For example, husband and wife (both U.S. citizens) have a combined estate worth $10 million with $2 million in husband’s name and $8 million in wife’s name. In 2011, husband dies; his estate is well under the $5 million estate tax exclusion, so his estate would not owe estate tax. However, wife’s estate exceeds the $5 million estate tax exclusion, so upon her death, using current rates her estate would owe estate tax of approximately $1.2 million (in the absence of any other estate tax planning). Previously, taxpayers would need to implement an estate plan to avoid this negative result. However, portability allows husband’s estate to “port” his unused exemption ($3 million) to his wife. Wife would then have $8 million of total exemption ($5 million estate tax exemption plus $3 million of unused exemption) available at her death, which would be sufficient to offset the $8 million of value in her estate.

In this example, portability has the potential to save the combined estate a little over $1 million in taxes, but only if husband’s executor files Form 706 by the deadline. If the executor fails to file, husband’s estate would be a prime candidate for the relief provisions of Revenue Procedure 2014-18. Executor can now file the 2011 Form 706 by December 31, 2014, to elect to transfer the husband’s unused exemption to his wife. Wife is then free to use the additional estate tax exemption for current gifts or upon her death.

Who can benefit?

At a minimum, smaller estates with assets that have significantly appreciated since the death of the first spouse and estates of individuals who were in same-sex marriages (and thus unable to make a portability election under the law existing prior to the Windsor decision) are likely candidates for the relief offered under Revenue Procedure 2014-18. However, there are numerous situations in which a portability election may offer significant estate and gift tax savings for the surviving spouse.

A cautionary tale for 2014

No special procedure is available for estates of decedents who die after 2013 and miss the filing deadline. Therefore, it is imperative that executors of estates of individuals dying in 2014 carefully consider whether there is an opportunity for portability, and, if so, file Form 706 to elect portability by the initial deadline. Missing the election deadline for decedents dying in 2014 will mean reverting back to previous, more onerous and costly provisions of requesting relief via an IRS private letter ruling and paying a $10,000 user fee to port the remaining exemption.

We want to hear from you! We encourage you to share this blog post on social media or contact Andy Whitehair at awhitehair@cohencpa.com or a member of your service team for further discussion.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.