A “Portability” election allows a spouse to use their deceased spouse’s unused estate tax exemption by transferring the unused portion to their own estate plan. This will save death taxes from the estate when they later pass. To utilize this benefit, a timely election is required to be made. Taxpayers (and trustees, executors and PRs) who failed to meet the deadline for making the election now have a limited opportunity to fix the problem. If you have a large estate (over $5,000,000) and lost your spouse sometime after December 31, 2010, the IRS has recently provided relief for you if you missed the deadline to make a portability election for your deceased spouse’s unused exemption amount. See Revenue Procedure 2017-34.
Following the death of a spouse in a family with a large estate, many trustees and executors settling the estate do not realize that there is a requirement to file a federal estate tax return for decedent’s who are not subject to an estate tax. They simply miss the deadline causing a costly tax mistake. Often, this oversight is not discovered until the surviving spouse later passes away. By then, it is too late to file for portability of any unused estate exemption amount from the first spouse’s death. When the deadline is missed, it causes more estate tax due at the surviving spouse’s death. Until recently, if this situation happened to you, the only avenue to correct the missed deadline was by submitting a costly request for the IRS to issue a private letter ruling allowing an extension to elect portability.
To help with this common oversight by trustees and executors—and to reduce the high volume of private letter rulings the IRS receives—the IRS first allowed retroactive portability claims under prior Revenue Procedure 2014-18. But those rules lapsed at the end of 2014. This year, the IRS issued a new Revenue Procedure, 2017-34, which grants a permanent automatic extension of the time to file an estate tax return, just to claim portability, beyond the original 9- month period. To utilize this extension, the trustee or executor must file a not-otherwise-required Form 706 estate tax return within 2 years of the decedent’s date of death.
The IRS has also created an additional temporary opportunity to make a very, very late portability election for decedents who died after December 31, 2010, but you must act before January 2, 2018. A surviving spouse (including same-sex married couples) may make a retroactive claim for portability for any spouse who passed away in 2011 or later. In situations where the then-surviving spouse has also passed and has an estate tax due, an opportunity exists to retroactively claim portability, and then file an amended estate tax return for the second spouse who died. Acting in this short window of relief may not only result in an estate tax savings at a surviving spouse’s death, but may even result in a refund of estate taxes already paid!
If you lost a spouse any time after 2010, or if both spouses have passed since 2010, and portability was not timely elected, there may still be time to take advantage of this IRS relief if you act before January 2, 2018. Call us today to find out if we can help you with this estate planning tool.