A significant tax benefit for many taxpayers is the concept of portability, which allows a spouse who dies to transfer his or her unused estate tax exemption to the surviving spouse. Even though portability was introduced in 2011, and made permanent in 2013, many executors still have not taken advantage of it.
But there’s time. Effective June 9, 2017, if you are an executor who missed the portability election opportunity, the IRS is giving you another chance. Executors now have until January 2, 2018, or the second annual anniversary of the decedent's date of death, whichever is later, to elect portability.
That $10 Million Thing
When meeting with married clients with smaller estates, they often say that estate tax is not an issue because of the “$10 million thing.” The $10 million to which they refer is actually made up of two numbers. Each spouse is entitled to a lifetime exemption (the cumulative amount that can shelter assets from estate and gift tax) in an amount that started at $5 million in 2011 and has since been indexed for inflation. For 2017, the lifetime exemption sits at $5.49 million. However, that amount is per taxpayer.
If a married couple owns assets in excess $5.49 million, then they may need to rely upon a portability election to avail themselves of that $10 million thing. A married couple can shelter assets from estate tax up to the combined lifetime exemption amount of $10.98 million, 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.
The portability provision was added over six years ago, yet taxpayers and advisors still struggle with it. As a result, many executors may have missed the opportunity to make a portability election, thus, potentially subjecting the surviving spouse unnecessarily to estate tax.
The IRS previously issued Revenue Procedure 2014-18 to provide some limited relief in the first years following the implementation of portability. That relief expired December 31, 2014, leaving executors with only one other option: request relief via an IRS private letter ruling and paying a user fee of up to $10,000 in addition to professional fees to draft the request.
Don't Say the IRS Never Did Anything for You
Effective June 9, 2017, the IRS released Rev. Proc. 2017-34 providing additional relief for executors who failed to timely make a portability election by the deadline. The new relief provisions give an executor until the later of January 2, 2018, or the second annual anniversary of the decedent's date of death to file Form 706 and elect portability.
Who is Eligible?
The simplified method of the revenue procedure is available to the executor if ALL of the following criteria are met:
- The decedent died after December 31, 2010, was survived by a spouse, and was a citizen or resident of the United States on the date of death,
- The executor is not required to file an estate tax return based on the value of the gross estate,
- The executor did not file an estate tax return within the time required, and
- The executor fulfills all of the requirements of this revenue procedure, including properly filing Form 706 by the deadline.
Limited Relief in the Future
If you missed making a portability election at any point since the law's enactment, this is very helpful. However, one must question how helpful this procedure will be going forward. Generally, Form 706 is due nine months following the decedent's date of death with an option for a further extension of six months. Essentially, an executor has 15 months to file Form 706 and elect portability under the normal rules. Following the release of Rev. Proc. 2017-34, an executor now has 24 months following the decedent's date of death to elect portability.
While an additional nine months is certainly helpful, this still requires an advisor or executor to understand that portability should be considered following the death of the first spouse. If the issue is not addressed within two years of the decedent's death, then an executor who comes to this realization after January 2, 2018, will only have the expensive private letter ruling relief as an option. It is foreseeable that this issue only comes to light upon the second spouse's death, which could be 20 years later.
One Additional Note
The IRS will not issue a private letter ruling for a late portability election if this revenue procedure is available to the taxpayer. Accordingly, the IRS will not issue any letter rulings until after January 2, 2018, and if a private letter ruling was pending as of June 9, 2017, the IRS will close the request and refund the user fee. This would allow the executor to file a late portability election under Rev. Proc. 2017-34 without a user fee.
If you are an executor and believe you may have missed out on the portability election, please consult with your advisors soon to begin the process of election.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.