IRS Grants Temporary Relief on Portability Election

This week the IRS released Revenue Procedure 2014-018 that temporarily allows an executor of an estate to make a late portability election.  Starting with deaths that occurred in 2011, a surviving spouse is allowed to “port over” the unused portion of the estate tax exemption of the deceased spouse.  This has become known as Portability.  To avail himself or herself of the benefits of Portability, the surviving spouse is required to timely file an estate tax return (Form 706) within nine (9) months of the date of death.For example, Bob and Sally have a combined estate that totals $6 million.  If Bob died in January 2013 and Sally inherited everything, Bob would not use any of his $5.25 million 2013 estate tax exemption as everything would pass to Sally tax free because of the unlimited marital deduction.  Sally then dies in 2014 with all $6 million in her estate.  If she had timely filed an estate tax return for Bob and elected portability in 2013 there would be no estate tax due at Sally’s death (her total exemption would be $10.59 million – Bob’s $5.25 million exemption plus her $5.34 million exemption for 2014).  If she had failed to timely file the return, estate taxes would be owed on the difference between her $5.34 million 2014 exemption and the $6 million estate or $660,000.  At the current rate of 40%, that would mean $264,000 payable to the IRS.  Fortunately for Bob and Sally’s family if they missed the opportunity the first time, the IRS has now given them a second chance.This revenue procedure applies only if:1. The taxpayer is the executor of the estate of 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.

2. The estate is not required to file an estate tax return under § 6018(a) (as determined based on the value of the gross estate and adjusted taxable gifts); and3. The taxpayer did not file an estate tax return within the time prescribed for filing an estate tax return required to elect portability.  This Revenue Procedure cannot be used as a “do-over” for those who timely filed a return, but opted out of Portability.If eligible, the estate must:

  • File a complete and properly prepared Form 706 by December 31, 2014; and
  • State at the top of the form that the return is “FILED PURSUANT TO REV. PROC. 2014‑18 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).”

If you were unaware of this election or otherwise failed to take advantage of it, we would strongly encourage you to review your situation and determine whether or not filing for portability makes sense.  Remember, just because you are under the estate tax exemption amount today does not mean that you will be in the future given the growth that commonly occurs.