Prior to 2011, if
the decedent spouse did not fully utilize his or her estate tax exemption in
the estate plan, the unused portion was wasted and was not available to be used
by the surviving spouse. After 2010, the
tax law was changed to permit an election whereby the unused exemption could be
“ported” to the surviving spouse and add to that spouse’s own personal
exemption amount. The ported exemption
is allowed for both gift and estate tax exemptions but not for the generation
skipping transfer tax exemption. The
election is made by filing a timely estate tax return (Form 706, including a timely
filed extension) for the decedent spouse.
The decision to make the portability election is not always an easy one
to make because the cost of preparing a Form 706 can be expensive (depending
upon the type of assets owned by the decedent spouse) and it is possible that
the ported exemption may not ever be needed to exempt the surviving spouse’s
estate from estate tax. In addition, the
portability election is often overlooked because its availability is not widely
known or fully understood.
In Revenue
Procedure 2014-18, the IRS granted an extension until December 31, 2014 to make
the portability election for small estates that weren’t otherwise required to
file an estate tax return and had missed the filing deadline. Since this time the IRS has had to deal with
numerous private letter ruling requests asking for extensions of time to make
the election. The IRS has now issued
Revenue Procedure 2017-34 granting a permanent extension period. The due date of the portability election is
now extended to the later of January 2, 2018 or the second anniversary of the
decedent’s death. After this time period
expires, a late filed portability election can only be made after seeking a
private letter ruling from the IRS.
Only estates
that are not otherwise required to file an estate tax return are permitted to
use the Rev. Proc. 2017-34 extension period.
An estate is generally required to file an estate tax return if the
total gross estate plus adjusted taxable gifts and specific exemption is more
than the basic exclusion amount for the year of death (e.g., $5,490,000 for
deaths in 2017). In addition, the
decedent must have died after 2010 and have been survived by a spouse, and an
estate tax return must not have been previously filed.
The portability
election can provide valuable estate tax benefits, but there can be reasons not
to make the election. The new revenue
procedure allows small estates additional time to make this analysis.
