Making Use of a Deceased Spouse’s Unused Estate Tax Exemption Simplified

The election for married couples to elect portability of the Federal Estate Tax Exemption was introduced in late 2010 when the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act (“TRUIRJCA”) was signed into law. Portability allows a surviving spouse to possibly make use of their deceased spouse’s unused federal estate tax exemption by adding it to their own exemption. The estate tax is a tax on the amount of a decedent’s taxable estate (pus adjusted taxable gifts). Under federal law, a certain amount of each estate is exempted from taxation. The exemption amount for 2017 is $5.49 million.[1] This means that estates valued above this amount are subject to a 40% estate tax for the amount exceeding the exemption. A little over two years following the signing of the TRUIRJCA, the American Taxpayer Relief Act (“ATRA”) was signed into law, making portability a permanent election for married couples.

However, the unused applicable exemption amount does not automatically transfer to the surviving spouse upon the death of the predeceased spouse. In order to elect portability, the executor must, on or before nine months following the death of the predeceased spouse, file a United States Estate (and Generation-Skipping Transfer) Tax Return (IRS Form 706). On or before that due date, an Application of Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes (IRS Form 4768), can be filed to request an automatic six-month extension.

In the event that the estate missed the nine-month deadline, there were two separate processes in place to elect portability at a later date, depending on the decedent’s date of death. Where the decedent died after December 31, 2010, and on or before December 31, 2013, the IRS, in Rev. Proc. 2014-18, provided for a simplified method of filing so long as the estate met certain qualifications. The decedent must have been a citizen or resident of the United States at the time of death, and the estate must have been one not required to file an estate tax return under Sec. 6018(a) because the value of the gross estate (plus adjusted taxable gifts) did not exceed the basic exemption amount in effect for the year of death. If these qualifications were met, and the estate tax return was filed before the December 31, 2014 deadline, stating that the form was being filed pursuant to Rev. Proc. 2014-18, the estate tax return would be considered timely filed and a valid portability election. No filing fee was required.

However, if the decedent died on January 1, 2014 or later, the process was more difficult and more expensive. Estates that did not qualify for Rev. Proc. 2014-18 relief were required to seek an extension to file the estate tax return to elect portability under Regs. Secs. 301.9100-1 and 301.9100-3 for an estate not required to file an estate tax return under Sec. 6018.[2] Accordingly, the executor looking to elect portability was required to submit a private letter ruling request providing evidence to the IRS’s satisfaction that the executor acted reasonably and in good faith and that granting relief would not prejudice the interests of the government. Regs. Sec. 301.9100-3(c)(1)(i) lists the ways in which an executor can be deemed to have acted reasonably and in good faith. The private letter ruling request had to be submitted in accordance with applicable procedures, contain affidavits and declarations from the parties, and be accompanied by a filing fee ($10,000 for requests received after February 1, 2017).

But recently the IRS, in Rev. Proc. 2017-34, 2017-26 (effective June 9, 2017) eliminated the requirement that an executor seek a private letter ruling to file a late estate tax return electing portability. So long as the decedent was a citizen or resident of the U.S., the estate was not required to file an estate tax return under Sec. 6018, and the estate tax return is filed before the second anniversary of the decedent’s death, or (if later) January 2, 2018, stating that the return is being “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A),” the executor may elect late portability without seeking a private letter ruling. No fee is required. However, the private letter ruling request procedure is still available to an executor who fails to file under Rev. Proc. 2017-34 within the applicable time constraints.

The IRS has made it easier and less expensive for executors to file late estate tax returns electing portability. For letter rulings pending on the effective date of Rev. Proc. 2017-34, 2017-26, the file will be closed and the user fee refunded. The estate may then obtain relief granted by Rev. Proc. 2017-34, 2017-26, by complying with the above procedure. However, it should be noted that this relief is only available for estates where the gross estate (plus adjusted taxable gifts) do not exceed the exemption amount applicable as of the decedent’s year of death and that the late return must be filed no later than two years after the decedent’s date of death or, if later, January 2, 2018.

[1] Some states have their own estate tax, some of which exempt estates at the federal level, and others which have lower exemption levels. In New Jersey, the current exemption is $2 million.

[2] No relief is available for estates large enough to be required to file an estate tax return under Sec. 6018 that failed to timely file.

For more information or if you have any questions about estate planning and taxation, please contact Judson M. Stein, Chair of the Trusts & Estates Practice Group, at 973-230-2080 or jstein@genovaburns.com or Lauren M. Ahern, Associate in the Trusts & Estates Practice Group.