Extension for Small Estates to Elect Portability

The IRS just released Revenue Procedure 2014-18 outlining a procedure for certain eligible small estates of persons who died before 2014, and who had a surviving spouse, to obtain an automatic extension of time to elect “portability.”  Portability was added to the law for deaths after 2010.  Portability allows the surviving spouse to elect to add the deceased spouse’s unused estate tax exclusion (DSUE) amount to his or her own estate and gift tax exemption amounts.  The election is made by filing Form 706, the estate tax return.  In some cases, administrators of small estates have had a difficult decision to make, whether to incur the costs of filing an estate tax return when it wasn’t otherwise necessary, simply to make the portability election.  This new procedure gives administrators a fresh start and the ability to examine the issue again, as long as the estate return is filed by the end of 2014.

For example, assume husband died in 2011 having a gross estate of $2 million and that the assets were left to a credit shelter trust under his estate plan.  His DSUE is $3 million.  Assume the surviving spouse also had a gross estate of $2 million.  Since the surviving spouse’s estate is way under the $5 million exemption, and the exemption is indexed for inflation going forward, does it make sense to incur the costs (which could start at $5,000 at the low end) of filing an estate tax return to make the portability election?  On the other hand, if the husband’s assets were all left to the surviving spouse, then the gross estate of the surviving spouse would be $4 million and the husband’s DSUE would be $5 million.  In this case, it would be reasonable to assume that the surviving spouse’s estate could grow and exceed the future estate tax exemption amount, and so the portability election would be desirable.  Note, that there are many other factors that must be considered before deciding whether or not to make the portability election.  These factors are not discussed in this article.

A small estate is one where the value of the gross estate (plus adjusted taxable gifts) is less than the Form 706 filing threshold amount.  The portability election is made by filing the Form 706 estate tax return.  Form 706 is due nine months following the date of death.  A six-month extension can be obtained if the extension request is filed by the original due date.

Before this revenue procedure, the estate administrator had to apply to the IRS under Treas. Reg. §301.9100-3 to obtain late filing relief in order to file a late estate tax return to make the portability election.  The application had to establish to IRS's satisfaction that the estate acted reasonably and in good faith and that granting relief would not prejudice the interests of the government.

This revenue procedure now grants an automatic extension for a late estate tax return filed to make the portability election if all of the following criteria are met:

1.     The decedent: (a) had a surviving spouse, (b) died after 2010 but before 2014, and (c) was a citizen or resident of the United States on the date of death.

2.     The estate wasn’t required to file an estate tax return because the gross estate (plus adjusted taxable gifts) was under the filing threshold.  The relevant filing thresholds were as follows:

Deaths in 2011:  $5,000,000
Deaths in 2012:  $5,120,000
Deaths in 2013:  $5,250,000

3.     The estate did not file Form 706 by the due date; and

4.     The estate files a complete and properly-prepared Form 706 on or before December 31, 2014.

If these criteria are not met, estates may continue to request an extension of time to make the portability election under Treas. Reg. §301.9100-3 by filing a private letter ruling request with the IRS.