Portability Election – There Really is a Second Bite at the Apple!”

In a surprise announcement, the IRS has recently declared, in Revenue Procedure 2017-34, effective June 9, 2017, that there is now an extended time for estates to file for portability and preserve the unused spousal exclusion.  This applies to estates where there is a surviving spouse that might have previously missed the opportunity to timely file Form 706 (the estate tax return) for a deceased spouse and preserve their unused estate tax exclusion.  The probate and estate planning attorneys at Damon, Ver Merris, Boyko & Witte, PLC, are ready to review your filing options with you.    

Typically, an estate tax return is due 9 months after the date of death (unless extended).  This return is required to be filed by the personal representative (executor) of an estate if the value of the decedent’s lifetime gifts and assets held at the time of death exceed the current lifetime exclusion, which for 2017 is $5,490,000.  If these combined amounts do not reach this threshold (or lower amounts for prior years) then no estate tax return is required.

If no estate tax return is filed, however, then no portability election can be made as it is only through the filing of such a return can a decedent’s unused estate tax exclusion amount (Deceased Spousal Unused Exclusion amount or DSUE) be transferred (or ported) and become available for application to the surviving spouse’s subsequent transfers during life or at death. This concept is known as “portability” and effectively lets a married couple double the available estate tax exclusion, from $5,490,000 to a total of $10,980,000 (for 2017).   Thus, for over 99% of the population, a married couple can transfer all of their property free of any estate or gift tax obligations, if portability is elected.

Under the new regulations, qualified estates of spouses who passed away as early as January 1, 2011  will have until January 2, 2018, or two years from the date of the decedent’s death, whichever is later, to file form 706 and make the portability election.  A qualified estate is one where there was no need to file an estate tax return because the estate assets were not large enough; where the decedent was survived by a spouse; the decedent died after December 31, 2010; and was a U.S. citizen or resident at the time of death.

If the estate is not so qualified, the personal representative (executor) will still have to request an extension of time to make the portability election by requesting a letter ruling.  (This author believes that because this was the only way to receive such an extension previously, once prior regulations expired at the end of 2014, that the IRS was overwhelmed by the considerable number of such requests.  This, in turn, placed a significant burden on the Service to issue letter rulings thereon.  Thus, in response,  they adopted the new administrative procedures to help limit their work load).

A personal representative in a qualified estate can simply file a “late” tax return utilizing form 706 by the extended deadline and simply state on the top of Form 706 that the return is “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER SECTION 2010 (c) (5) (A).  There is no additional filing fee or user fee required in order to obtain this type of relief.

Keep in mind that if the IRS, subsequent to the granting of the requested extension, determines that based upon the value of the gross estate and after taking into account any taxable gifts, the executor was required to file an estate tax return because these amounts total in excess of the estate tax exclusion amount for that year (again it is $5,490,000 for 2017), then the grant of the extension is deemed null and void.  In that case, if no timely estate tax return was filed, when required, then there was no portability election and it will not be available in such a delayed filing situation.  Contact the probate and estate planning attorneys at Damon, Ver Merris, Boyko & Witte, PLC to determine the appropriate filings with the IRS on your behalf.

Further, if estate or gift taxes were paid by the surviving spouse, or his or her estate, and then the portability election extension was made, if the period of limitations for filing a claim for a credit or a refund (Form 843 – Claim for Refund) of an overpayment of tax has expired (typically 3 years after the return was filed), this time period will not be extended by the extension of the time to elect portability.   Since the DSUE amount is not available until the portability election is made, there could be situations where the surviving spouse has filed form 709 (Gift Tax Return) before the estate of her deceased spouse makes the delayed  portability election and the surviving spouses claimed application of the DSUE amount will be denied.  Thus, as in many situations, timing is everything.

Knowing your legal rights and exercising them are critical to saving taxes in this area, as the taxable estate tax rates, after any applicable exclusions and credits, can quickly climb to the 40% top rate.    At those rates the taxes can add up fast.

The filing of an estate tax return is not uncommon.  Contact the knowledgeable estate planning professionals at Damon, Ver Merris, Boyko & Witte, PLC, to review your situation and make sure you do not throw away the decedent’s DSUE (and potentially tens of thousands of dollars of your money), and otherwise determine what has to be filed, before it is too late.  Remember, it is rare that you get two bites at the apple; don’t bite off more than you can chew.   – Attorney Larry A. Ver Merris /  July 5, 2017