In response to a flood of IRS Private Letter Ruling requests to extend the time for making the gift and estate tax exemption portability election for the estate of the first spouse to die, the IRS has issued Revenue Procedure 2017-34 granting limited relief on a blanket basis.
A new rule, first effective in 2011, allows the first spouse to die to transfer his or her unused Federal Gift and Estate Tax Exemption to the surviving spouse. This is called “portability” of the Federal Gift and Estate Tax Exemption between spouses. It can be very useful to help the surviving spouse avoid Federal gift and estate taxes if the surviving spouse’s own estate exceeds his or her own gift and estate tax exemption, taken alone. At present, each person has a gift and estate tax exemption of $5,490,000, which is indexed annually for inflation.
Because this portability election is such a new and different tax provision, many practitioners were unaware of it. As a result, they failed to advise their clients to take the necessary action to make the portability election, which requires the first spouse’s executor to timely file a Federal estate tax return after the first spouse’s death. The deadline for filing the Federal estate tax return is generally nine (9) months after the decedent’s death, but can be extended to fifteen (15) months with an automatic extension application. Significantly, to make the portability election, the Federal estate tax return had to be filed even if the first spouse’s estate was below the usual filing threshold.
In early 2014, the Service published a prior Revenue Procedure providing a simplified method for obtaining an extension of time to make a portability election, but that relief was only available to the estates of decedents dying after Dec. 31, 2010, and only applied if the application was made before the end of 2014. Since then, there has been no relief provision; in order to obtain more time to make the portability election, the taxpayer has had to request a private letter ruling from the IRS on an individual basis, which is a very expensive and time-consuming procedure, as the IRS filing fee alone is at least $10,000.
Apparently, the IRS has been inundated with such private letter ruling requests since the end of 2014. To stanch this flow, the IRS recently announced this new Revenue Procedure (2017-34), which appears to be their attempt at a permanent solution to making the late portability election. Under this new procedure, simply by filing the Federal estate tax return for the estate of the first spouse to die and adding a statement at the top of the first page that it is FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A), the election can be made without filing a private letter ruling, if several conditions are met.
The limitations and caveats to this new IRS procedure are as follows:
- It can only be used until the later of Jan. 2, 2018, or the second anniversary of the decedent’s date of death. Thus, it can be used between now and year end for estates going all the way back to 2011. Going forward, after 2018 arrives, the time limit will be the second anniversary of the first spouse’s date of death. Since the Federal estate tax return is due nine (9) months after death, or fifteen (15) months with an extension, this time limit of two years only provides nine (9) additional months for the estate to file a late portability election estate tax return.
- The decedent must have died after 2010 survived by a spouse, and must have been a citizen and resident of the US on the date of death.
- The estate must not be so large that a Federal estate tax return was required to be filed under § 6018(a), which generally means that the value of the gross estate and adjusted taxable gifts is under the Federal gift and estate tax exemption amount for the year of filing, currently $5,490,000. If the estate files under this Revenue Procedure on the basis that an estate tax return was not required, but the IRS later determines that a return was required, then the portability extension granted under the Revenue Procedure will be deemed null and void ab initio.
- The executor of the estate of the first spouse to die must not have filed an estate tax return on a timely basis already. If the return has been filed, the executor should have made the portability election on that return, if one were to be made.
- This filing procedure does not extend the time for the surviving spouse to obtain a refund or credit against the surviving spouse’s own gift and estate taxes. So, if the statute of limitations has already run on the estate or gift tax return filed by the surviving spouse when the portability election is made under this Revenue Procedure, the surviving spouse can be time barred from obtaining a tax benefit from the late portability election made for the estate of the first spouse to die.
- The surviving spouse may not obtain any gift and estate tax refund or credit from any late portability election made under this Revenue Procedure before the necessary estate tax return is filed to make the portability election. However, if the surviving spouse has a statute of limitations that will close before the estate tax return necessary to make the late portability election can be filed, the Revenue Procedure does allow the surviving spouse to make a protective refund claim based on the presumption that the late portability election will be made thereafter. This protective refund claim will then be allowed if and when the estate tax return making the portability election in the first spouse’s estate has been properly filed.
- If an estate does not timely file a late portability election under these rules, it can still seek an IRS private letter ruling on an individual basis. However, obtaining a favorable ruling through a private letter ruling request is not guaranteed.
Overall, this new Revenue Procedure is a step in the right direction by the IRS. However, there are some limits on the Procedure that likely will prove problematic in the future. Only allowing the late portability election return to be filed within two years after death does not appear to be sufficient time. Further, allowing the statute of limitations to foreclose the surviving spouse from obtaining the tax benefit of the portability election on his or her own gift and estate tax return will create hardships in many cases. While the IRS indicated that it already had considered and rejected the request for a permanent and unlimited extension, the IRS may be compelled to issue at least additional amounts of time beyond those allowed in this Revenue Procedure. Ultimately, a permanent and unlimited extension would seem to make the most sense for all concerned.