New Extension Granted for Certain Estates to Make the Portability Election

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.