A portability election allows a deceased spouse’s estate to convey the decedent’s unused estate and gift tax exclusion amount to his or her surviving spouse. This is known as the ‘deceased spousal unused exclusion’ or DSUE amount. The surviving spouse may then apply the DSUE amount to his or her lifetime gifts or testamentary bequests and thus avoid estate and gift taxes. The result, in most instances, is that a couple may be able to use both estate exclusion amounts fully without the machinations to rebalance their estates so that the assets are distributed equally between the two spouses.
So why is portability important? It means the surviving spouse has the ability to claim a greater estate tax exclusion. For example, Fred dies in 2013, when the estate tax exclusion amount is $5,250,000. He gives everything to his wife, Wilma, and claims the marital deduction, which is unlimited. Wilma may, after the portability election is made, use that exclusion amount. If she dies in 2018, when the exclusion amount is $5,600,000, her estate can claim an exclusion amount of $10,850,000. She and her estate will not pay any estate or gift tax on transfers totaling up to that amount.
The election is available to estates of decedents passing away 2011 or later. While a great estate planning tool, many people did not find out about the opportunity until it was too late, because the election is made by filing an estate tax return – not ‘required’ by an estate not owing estate taxes, but still necessary to elect portability.
The DSUE election is supposed to be made within nine months of the decedent’s date of death. After the transition period and the last simplified extension (ending in 2014), the only way to get an extension of time to file the estate tax return electing portability was to make a private letter request to the IRS. The process is expensive and time consuming. Fortunately, earlier this year the IRS issued Rev. Proc. 2017-34 at the end of June this year. Instead of going through the process of obtaining a private letter ruling, the Form 706 estate tax return can be submitted with “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A)” written across the top of the return. However, this simple extension only lasts until the later of January 2, 2018, or the second anniversary of a decedent’s date of death. This means that going forward, if the estate administrator misses the nine month deadline, he or she can still file the return electing portability for two years after the decedent’s date of death. For the estates of those who died before January 2, 2016, the deadline is January 2, 2018. For those who died after that date, the deadline is two years from the date of death.
There is one other thing you should know about electing portability – although the estate administrator should, but is not required, to provide the accurate value of the decedent’s estate, the return remains open in order to determine the amount of the DSUE amount available to the surviving spouse. Thus, if the surviving spouse passes away eight years later, the information on the first estate tax return can still be changed in order to determine the amount the surviving spouse can claim is exempt from estate tax. If the IRS determines that the first spouse’s estate does owe estate tax, the IRS only has three years from the date the return was due or when it was filed (whichever one is later) to assess the estate tax.
Please contact me if you have other questions.