ESTATE PLANNING: 

Relief Available for Missed Portability Election

For affluent couples, portability — which permits a surviving spouse to “inherit” a deceased spouse’s unused gift and estate tax exclusion — can mean millions of dollars in estate tax savings. To enjoy this benefit, however, the deceased spouse’s estate must have made a portability election on a timely filed federal

estate tax savings. To enjoy this benefit, however, the deceased spouse’s estate must have made a portability election on a timely filed federal estate tax return. Unfortunately, many estates fail to make the election because they’re not otherwise required to file a return.

Consider this example: Louise died in 2015, with a taxable estate worth $1 million. She did not make any taxable gifts during her life. Because her estate was well within the exclusion amount ($5.43 million in 2015) her executor did not file an estate tax return and, therefore, did not make a portability election. Fast forward to 2017: Louise’s husband, Henry, dies with a taxable estate worth $10 million. The exclusion has grown to $5.49 million, but Henry applied $2.49 million of that amount toward taxable gifts during his lifetime. After subtracting his unused exclusion amount ($3 million), his estate is left with a tax liability of $2.8 million. Had Louise’s estate made the portability election, Henry’s estate could have taken advantage of her unused exclusion amount to reduce its tax liability to $628,000 — saving nearly $2.2 million in taxes.

Ordinarily, the only way to obtain relief for a missed portability election is for the deceased spouse’s estate to request a private letter ruling from the IRS granting an extension of time to make the election. But applying for such a ruling is a time-consuming, expensive process — the user fee alone is $10,000 — and there’s no guarantee the IRS will grant the request. Recently, however, the IRS issued Revenue Procedure 2017-34, granting an automatic extension to qualifying estates. To qualify, the following requirements must be met:

• The decedent died after 2010, was a U.S. citizen or resident, and was survived by a spouse;
• The executor was not otherwise required to file an estate tax return and did not do so before the filing deadline;
• The executor files a complete and properly prepared Form 706 — United States Estate (and Generation-Skipping Transfer) Tax Return — on or before the later of January 2, 2018, or the second annual anniversary of the decedent’s date of death; and
• The following language appears at the top of the return: “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).”

Taxpayers whose spouses died after 2010 and would benefit from portability should determine whether their spouses’ estates made the portability election on a timely filed estate tax return. If not, the automatic extension procedure outlined in Rev. Proc. 2017-34 can help them avoid a sizable estate tax bill and preserve more of their wealth for their children or other beneficiaries.