Federal estate tax rules allow everyone to pass a certain amount of wealth – now $5.49 million – to their heirs (other than spouses) without tax. You can pass an unlimited amount of wealth to your spouse without federal estate tax. This free passage of wealth can be thought of as an estate tax “coupon.”
Prior Rule. Before 2011, if the first spouse to die did not use all of his or her estate tax coupon, the unused portion of the coupon was permanently lost. So, estate plans were designed to maximize the value of the “coupon” by equalizing the property that each spouse owned. But, this rule was often a significant punishment to couples who did not plan, because those couples ended up owing far more estate tax than if they had properly planned.
Portability Change. In light of this result, Congress acted to allow portability of the unused portion of the estate tax coupon between spouses. In other words, if the first spouse to die only used $2 million of his or her $5.49 million coupon, the remaining amount of the coupon could be used by the surviving spouse. Portability was allowed for spouses who died in 2011 and later years.
However, portability is not automatic. The general rule is that the executor of the first spouse to die must elect portability within a timely filed estate tax return for that spouse’s estate. This is true even if the estate would not otherwise be required to file an estate tax return (because the value of the estate is below the filing threshold).
Missed Deadlines. As you may imagine, numerous taxpayers missed this deadline for filing and faced the loss of their right to portability. IRS regulations allow the IRS to grant an additional extension of time to make a portability election, but this had to be done via a private letter ruling request. This procedure can be extremely expensive. The IRS filing fee alone, without factoring in time to prepare the request, is several thousand dollars. In addition, the IRS has been bombarded with these requests.
Automatic Extension. The IRS has now issued a Revenue Procedure which will automatically allow non-taxable estates to obtain a time extension to make a portability election. To claim the election, an executor must:
- File a complete and proper estate tax return before the later of (a) the second anniversary of the decedent’s date of death; or (b) January 2, 2018.
- Make a statement at the top of the estate tax return, confirming the estate tax return is being filed to elect portability.
This means that advisors may be able to obtain portability for surviving spouses who thought they lost that opportunity.
Non-Taxable Estates. Advisors should be aware that, if it is later determined that an estate was required to file an estate tax return because of the value of the estate, the extension granted under this new procedure will be void and inapplicable. In addition, this method for granting an extension to elect portability is only available if an estate tax return was not filed by an executor. This procedure is intended to apply to non-taxable estates only.
Need Valuation. The requirement to file a complete and proper estate tax return means that all property owned by a decedent must be valued as of the date of death. This valuation could be scrutinized by the IRS, so advisors should take this requirement seriously. In addition, once made, the portability election is irrevocable.
Refund Claim. If a surviving spouse has already paid gift tax, or his or her estate paid estate tax, and application of the first spouse’s remaining “coupon” results in an overpayment of this tax, a claim for refund can be filed only if the normal period for filing a refund on that gift or estate tax is still open. If you or a client fits into this situation, we suggest that action be taken quickly to request a refund of this tax.
Exclusive Method. This new procedure is intended to be the exclusive way to obtain an extension to make a portability election for those eligible to file. The IRS has stated that a pending private letter ruling request will be closed (with the fee refunded) and the executor will be required to request an extension with this new procedure.
This new procedure will allow surviving spouses to receive portability where their opportunity may have been lost (or effectively lost behind a high cost procedure). Many surviving spouses will need to act quickly – by the end of the year – to claim portability. If you are interested in this, for yourself or a client, feel free to contact a member of the McGrath North Tax Group to discuss this procedure in more detail.