The IRS recently issued Revenue Procedure 2017-34, which grants (in some cases) an automatic extension of time to file an estate tax return for estates that were not required to file estate tax returns, but for which the executor would now like to make a portability election.
A married taxpayer who neglected to make the portability election upon the death of the spouse may now have another opportunity to make that election.
Each individual has a basic exclusion amount, which is the amount that can be transferred free of federal gift and estate taxes. The basic exclusion amount was $5 million in 2011, and with the adjustment for inflation, the 2017 basic exclusion amount is $5,490,000. Starting with 2011 decedents, the surviving spouse has the opportunity to later use the remaining amount from the deceased spouse’s unused exclusion (DSUE) amount in addition to his or her own exclusion amount when making gifts and upon death.
The ability to transfer the DSUE to the surviving spouse is referred to as “portability.” Here is an example of how portability might benefit a surviving spouse:
Assume that Husband died in 2011, having made no taxable gifts and having a $3 million taxable estate. Husband’s estate files the estate tax return, which permits Wife to use Husband’s DSUE of $2,000,000 ($5,000,000 – $3,000,000). As of Husband’s death, Wife has made no taxable gifts. Thereafter, Wife does not have to pay taxes on the first $7 million of her assets (her $5 million basic exclusion amount plus $2 million DSUE from Husband), which she may use for lifetime gifts or for transfers at death.
The portability election must be made by timely filing an estate tax return in order for the decedent’s surviving spouse to take advantage of this provision. The estate tax return must be filed to make the election even if the estate would not otherwise be required to file a return (i.e., the estate’s total value on the date of death is less than the exclusion amount for that year, currently $5,490,000).
The estate tax return is due nine months after date of death, and the due date may be extended for six months.
What Revenue Procedure 2017-34 Provides
Estates that have no filing requirement (i.e., because the estate was less than the exclusion amount) may seek relief under this Revenue Procedure. To obtain the relief, the estate tax return must be filed on or before January 2, 2018. The IRS has provided an automatic extension until that date. However, if a return was required to be filed, there is no relief under this Revenue Procedure.
What Should the Executor Do?
There is no easy way to determine whether the DSUE election should be made. Considerations include:
- The age of the surviving spouse. If the surviving spouse is young, there is more time for the survivor’s estate to grow.
- The size of the survivor’s estate and potential for growth.
- The potential of the survivor’s estate to increase because of gifts, inheritance, and unexpected events, such as winning the lottery.
- The fees required to be paid for the preparation of the estate tax return, which is not otherwise required to be filed.
If your spouse is recently deceased, we recommend (in most cases) that you file the estate tax return. Without it, this portability election cannot be made, and the election may eliminate or reduce your future gift and estate taxes.
If you were not required to file the estate tax return, but could have filed it to make the portability election and chose not to, you now have an opportunity to revisit that decision, file the return and make the election.
If you have questions or would like more information, please contact Donita Joseph at firstname.lastname@example.org or 844.4WINDES (844.494.6337).