On June 9, 2017 the Internal Revenue Service (the “IRS”) published Revenue Procedure 2017-34 (“Rev. Proc. 2017-34”) to announce a new simplified procedure for particular estates to obtain an extension of time to file a federal estate tax return and make a “late” portability election.
First introduced into federal law in 2011 and made permanent in 2013, portability provides the surviving spouse of a decedent dying after December 31, 2010 with the ability to utilize his or her deceased spouse’s unused federal estate tax exclusion amount (“DSUE amount”) in addition to his or her own federal estate tax exclusion amount. Before portability was enacted into federal law, any exclusion amount of the first spouse to die would be lost if not used by the that spouse for his or her lifetime or testamentary transfers. Now, with portability, married couples, both dying after December 31, 2010, are in effect given the opportunity to treat their two individual federal estate tax exclusion amounts ($5.49 million per person in 2017) as if they were one large combined exclusion amount.
The ability to use the DSUE amount, however, is not automatically provided to the surviving spouse upon the death of his or her spouse. Rather, an election to give, or “port,” the DSUE amount to the surviving spouse must be made on a complete and properly prepared Form 706, United States Estate (and Generation Skipping Transfer) Tax Return (“federal estate tax return”) filed within nine (9) months of the date of the first deceased spouse’s death or, fifteen (15) months from such date if an extension is timely filed. The requirement to make a portability election on a timely filed federal estate tax return in order for the surviving spouse to receive the advantages associated with portability applies even if the first deceased spouse’s estate is less than the federal estate tax return filing threshold (for 2017 threshold for filing is the combined amount of a decedent’s estate and adjusted taxable gifts in excess of $5.49 million). Thus, the election must be made on a timely filed federal estate tax return even though the federal estate tax return need not be filed otherwise. If the portability election is not made on a proper federal estate tax return within the requisite time, the surviving spouse loses the ability to utilize the DSUE amount to shelter and/or reduce his or her future lifetime gifts or estate from federal gift tax or federal estate tax.
Since its introduction into federal law, many surviving spouses and executors have unknowingly waived portability as they are often unaware of the concept of portability or the procedure for making the election. In particular, executors and/or surviving spouses of decedents having estates with a value below the mandatory federal estate tax return filing threshold often learn of portability and/or discover the procedure for making the election after the expiration of time to make such election. Prior to the issuance of Rev. Proc. 2017-34, if the executor missed the deadline for making a portability election on the first deceased spouse’s federal estate tax return, the remedies for correcting the missed election were generally limited to the costly and time-consuming procedure of submitting a private letter ruling request to the IRS asking for an extension of time to make a portability election pursuant to Treas. Reg. §301.9100-3.
For eligible estates under the mandatory filing threshold, Rev. Proc. 2017-34 significantly reduces the time and cost burdens associated with making a private letter ruling request by providing a simplified procedure to obtain an extension of time to make a “late” portability election. To make such an election under the simplified procedure, executors of eligible estates need only file a complete and properly prepared federal estate tax return with the statement “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A)” on the top of the first page by the later of January 2, 2018 or two years after decedent’s death. An estate is eligible to make a late portability election pursuant to the Rev. Proc. 2017-34 simplified procedure so long as all of the following requirements are met:
1) the decedent died after December 31, 2010;
2) the decedent was survived by a spouse;
3) the decedent was a citizen or resident of the United States on the date of death;
4) the combined value of the gross estate and adjusted taxable gifts was less than the mandatory federal estate tax filing threshold for that particular year;
5) the executor did not file an estate tax return within the time required by §20.2010-2(a)(1) for filing an estate tax return; and
6) the executor satisfies the required procedure for making the election set forth in the Revenue Procedure and as described above.
If the decedent’s estate is granted relief under Rev. Proc. 2017-34, the DSUE amount of that decedent is available to the surviving spouse or the estate of the surviving spouse for application to the lifetime or testamentary transfers made on or after the first deceased spouse’s date of death. If an estate of a decedent uses the opportunity set forth in Rev. Proc. 2017-34 by filing a federal estate tax return and making a late portability election under the simplified procedure, surviving spouses and/or estates of surviving spouses that have filed gift tax returns or estate tax returns subsequent to the decedent’s death will want to carefully review such returns to confirm whether the application of a deceased spouse’s DSUE results in an overpayment of gift or estate tax by the surviving spouse or his or her estate, thus giving rise to a claim for credit or refund. As there is a deadline for making a claim for credit or refund, advisors of clients who are considering making a “late” portability election pursuant to the simplified procedure in Rev. Proc. 2017-34 must be mindful of when a surviving spouse’s or the estate of such spouse’s claim for credit or refund for gift and/or estate tax expires. If a claim is still available, advisors must also ensure such claim is made before the deadline for filing the claim expires, even if it precedes the filing of a Rev. Proc. 2017-34 federal estate tax return.
Briele N. Haas is an associate with the firm. She earned her J.D. at Rutgers School of Law, Camden, New Jersey and her bachelor’s degree from Georgetown University in Washington, DC. Mrs. Haas earned her Masters of Law (LL.M.) in Taxation with Distinction in 2015 from the Temple University Beasley School of Law in Philadelphia, PA, where she also received an Estate Planning certificate.