In a long-awaited move, the IRS announced recently that taxpayers will now have at least two years to file an estate tax return to elect portability of a decedent’s unused estate tax exemption to the decedent’s surviving spouse.
The new rule was articulated by the IRS in Revenue Procedure 2017-34 and became effective as of June 9, 2017. Under this new two year filing window, which the IRS characterizes as a “simplified method for certain taxpayers to obtain an extension of time . . . to make a ‘portability’ election”, a decedent’s estate will have until the later of January 2, 2018 or the second anniversary of the decedent’s death to file an estate tax return to elect portability. In order to take advantage of this simplified method for obtaining an extension of time to elect portability, the executor must insert the following language at the top of the Form 706: “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER Code Sec. 2010(c)(5)(A).”
By way of background, the portability election, which was made permanent by the American Taxpayer Relief Act of 2012, allows the use of a decedent spouse’s unused estate tax exemption by his or her surviving spouse, on an elective basis. To elect portability, the estate of the decedent must file a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return and elect to transfer the decedent’s deceased spousal unused exclusion amount (also known as “DSUE”) to the surviving spouse, allowing the surviving spouse to apply the DSUE to the surviving spouse’s own lifetime gifts and transfers at death. In the past, a decedent’s estate filing a Form 706 for the sole purpose of electing portability was generally subject to the same filing deadlines (9 months from the decedent’s date of death, with an automatic 6 month extension available) as a decedent’s estate that was required to file an estate tax return. A decedent’s estate is required to file an estate tax return when the decedent’s gross estate plus adjusted taxable gifts during lifetime exceed the applicable estate tax exemption amount.
Since portability became permanent, the IRS reports that it has been flooded with ruling requests for extensions of time to elect portability, which has placed a “significant burden” on the Service. In 2014, the IRS sought to alleviate the problem by issuing Revenue Procedure 2014-18, which allowed estates of decedents dying after December 31, 2010 but before December 31, 2013 to make the portability election on or before December 31, 2014 (or any later filing deadline, if applicable). However, Revenue Procedure 2014-18 provided no relief for the estates of decedents that failed to take advantage of the grace period under that ruling or for the estates of decedents dying on or after January 1, 2014, in which case an estate would have to individually seek a ruling from the IRS granting an extension of time to file. In response, the IRS issued Revenue Procedure 2017-34, which practitioners hope will benefit taxpayers and the IRS hopes will alleviate the backlog of ruling requests for extensions of time to file estate tax returns to elect portability.
When should an estate consider electing portability? Obviously, when it is clear that the surviving spouse will have an estate at death that exceeds the surviving spouse’s remaining estate tax exemption, a portability return should be filed. However, even where the surviving spouse does not currently have an estate large enough to benefit from portability, it may be a good idea for the decedent’s executor to file the election anyway, particularly if the surviving spouse is in good health and could live for many more years. An unexpected increase in the value of the surviving spouse’s assets, a remarriage to a wealthier individual, or a precipitous drop in the federal estate tax exemption could all cause a non-taxable estate to become taxable in the future. On the other hand, of course, there is the expense of having the decedent’s estate tax return prepared, solely for the purpose of electing portability – not every decedent’s estate will want to incur that expense currently to potentially benefit the surviving spouse sometime in the future. Hopefully, the new two year window to elect portability will allow practitioners and their clients to more thoroughly consider the pros and cons of making the election, and will provide individuals who may not be aware of the availability or benefits of the election additional time to obtain professional advice.