Recently, the Internal Revenue Service provided estate representatives and their advisors additional time to revisit and reconsider making a “portability” election for Decedents passing away in 2011, 2012 and 2013 opening up additional post-mortem planning opportunities.
The concept of “portability” was introduced in December of 2010 under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, 124 Stat. 3296, 3302 (2010). “Portability” gives an estate representative an opportunity to make an election to combine a deceased spouse’s unused available exclusion amount with a surviving spouse’s exclusion. The portability election can only be made for a decedent dying after December 31, 2010. Moreover, a surviving spouse does not automatically inherit a deceased spouse’s unused exclusion, rather, an estate representative must make an affirmative election on a timely filed, complete and properly prepared Form 706, Federal Estate Tax Return.
Importantly, New Jersey does not have a corollary concept to allow a spouse to “port” their deceased spouse’s unused exclusion for New Jersey Estate Tax purposes. As such, New Jersey residents must still be mindful of each spouse’s New Jersey estate tax exclusion amount of $675,000.
Since portability’s inception, at least two important events have occurred that may have impacted an estate representative and surviving spouse’s prior decision to make a portability election. Between January 1, 2011 and January 1, 2013, many tax professionals and estate representatives were uncertain about the permanency of portability and, for cost reasons or other reasons, may have decided against filing a Form 706 Federal Estate Tax Return to make a portability election. However, in January 2013 the American Taxpayer Relief Act of 2012 (“ATRA”) was passed “permanently” setting the applicable exclusion amount to $5,000,000 (indexed for inflation) and implementing portability until Congress changes it. § 101(a) American Taxpayer Relief Act of 2012 , Pub. L. No. 112-rev. 0, 126 Stat. 2313. Additionally, in 2013, the Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA) in Unites States v. Windsor, 570 U.S. ___ (2013) and the IRS issued Rev. Rul. 2013-17 which expanded the definition of “spouse” and created the opportunity for married, same-sex couples to take advantage of the portability election.
In light of these changes, surviving spouses and estate representatives of decedents who passed away between January 1, 2011 and December 31, 2013 may wish to consider whether a late portability election can and should be made. To date, at least two procedures exist for making a late portability election. The applicable procedure is generally contingent upon the size of the decedent’s estate and whether a Form 706 Federal Estate Tax Return has been filed.
Procedure under Rev. Prov. 2014-18
On January 27, 2014, the Internal Revenue Service issued Rev. Proc. 2014-18 to provide a streamlined method for certain taxpayers to make a late portability election. Estates that qualify under Rev. Proc. 2014-18 to make a late portability election can do so by making the election on or before December 31, 2014 on a complete and properly prepared Form 706 with the following words at the top of the return: “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).” There is no user fee associated with filing this return. The Internal Revenue Service will then issue an Estate Tax Closing Letter acknowledging receipt of the Form 706. To qualify to make such election under Rev. Proc. 2014-18 all of the following requirements must be met:
- The Estate is a decedent who:
- Has a surviving spouse;
- Died after December 31, 2010, and on or before December 31, 2013; and
- Was a citizen or resident of the United States on the date of death.
- The Estate was not required to file an estate tax return because the value of the gross estate and adjusted gifts did not exceed the filing threshold.
- The Estate did not file an estate tax return within the time required to elect portability.
- The late portability election is properly filed pursuant to the procedures set forth in Rev. Proc. 2014-18. The late election must be filed on or before December 31, 2014.
It is worth noting that if the Estate elects to make a late portability election pursuant to this Revenue Procedure, in considering whether to grant relief, the Internal Revenue Service may determine the value of the estate is greater than the value reported on the federal estate tax return and determine the Estate was required to file an estate tax return. If such determination is made, the portability election will be deemed null and void.
Procedure under Treas. Reg. § 301.9100-3
If an Estate is not eligible to take advantage of the procedure under Rev. Proc. 2014-8, pursuant to Treas. Reg. §301.9100-3, the Executor may still be able to submit a private letter ruling request to the Internal Revenue Service seeking permission to make a late portability election. Under this procedure, in addition to satisfying one of the limited reasons for granting relief set forth in Treas. Reg. §301.9100-3, the Estate’s submission must meet the procedural requirements for requesting a letter ruling as described in Rev. Proc. 2014-1 which does, among other requirements, require a taxpayer to pay a user fee.
A new estate planning landscape has developed since ATRA’s enactment and the Supreme Court’s Windsor decision. For estates of decedent’s dying after December 31, 2010 and prior to January 1, 2014, such developments may have impacted a surviving spouse’s decision whether to “port” their deceased spouse’s unused exclusion amount. Additionally, estate representatives and their advisors may have simply missed filing the election. As such, it may be crucial to revisit and reconsider making a portability election with an experienced estate planning attorney to decide whether filing a Form 706 Federal Estate Tax Return and making a portability election would be beneficial.