Estate Tax Protective Claim and Portability Election Procedures Detailed

From the IRS

The IRS issued guidance on filing a protective claim for refund of estate tax and notifying the IRS that the claim is ready for consideration, and to alert executors to the need to file Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return, to make an election allowing the decedent’s spouse to receive the decedent’s unused estate and gift tax exemption.

The guidance on protective refund claims provides details on who may file a protective claim, methods by which the claim must be prepared and submitted, and identifying and documenting outstanding claims upon an estate and other deductible expenses for which the protective claim is filed (Rev. Proc. 2011-48).

Sec. 2053 identifies types of expenses that may be deducted from the value of decedents’ gross estates for determining the taxable amount of the estate. These expenses include funeral expenses, administration expenses, unpaid mortgages on the decedent’s property, and other claims against the estate. In some cases, such claims and expenses may not be known at the time of filing Form 706 or resolved within the general limitation period allowed for filing a claim for refund of tax overpaid (three years from the filing date or two years from the date taxes are paid, whichever is later; Sec. 6511(a)). In such cases, estate fiduciaries may file a protective claim for refund within the general limitation period to preserve the estate’s right to claim a refund beyond that period.

Regulations under Sec. 2053 finalized in 2009 provide that a protective claim must identify the claim or expense and why its payment has been delayed. Once payment is made, the estate’s fiduciary must within a reasonable period notify the IRS, which will then process the claim and issue a refund.

Method of Filing

For estates of decedents dying on or between October 20, 2009 (the revenue procedure’s effective date), and December 31, 2011, fiduciaries may file a Sec. 2053 protective claim using Form 843, Claim for Refund and Request for Abatement, with “Protective Claim for Refund Under Section 2053” written across the top, to the IRS address given in the revenue procedure.

For estates of decedents dying on or after January 1, 2012, the protective claim may be filed by either using Form 843 as described above or attaching to Form 706 one or more Schedules PC, which the IRS expects to first make available as part of the 2012 version of Form 706. A separate Schedule PC must be filed for each claim or expense.

Portability Election

On September 29, the IRS issued Notice 2011-82 to alert executors of the estates of decedents dying after December 31, 2010, of the need to file a Form 706 within the time prescribed by law (including extensions).

Form 706 must be filed to elect a portability exclusion, which allows the decedent’s surviving spouse to take advantage of the deceased spouse’s unused exclusion amount under Sec. 2010(c)(5)(A). To make the election, the executor must file a Form 706 for the decedent’s estate, even if the executor is not otherwise obligated to file a Form 706.

A portability election can be made only on a Form 706 timely filed by the estate of a decedent dying after December 31, 2010. Any attempt to make a portability election on a Form 706 filed for the estate of a decedent dying on or before December 31, 2010, will be ineffective.

The notice says that the timely filing of a Form 706, prepared in accordance with the instructions for that form, will constitute the making of a portability election by the estate of a decedent dying after December 31, 2010. Thus, by timely filing a properly prepared and complete Form 706, an estate will be considered to have made the portability election without the need to make an affirmative statement, check a box, or otherwise affirmatively elect on the Form 706. Until the IRS revises Form 706 to expressly contain the computation of the deceased spousal exclusion amount, a timely filed and complete Form 706 that is prepared in accordance with the instructions for that form will be deemed to contain the computation of the deceased spousal unused exclusion amount, thereby satisfying the requirements in Sec. 2010(c)(5)(A) for making an effective election.

The notice says that not filing a timely Form 706 will prevent the making of the election for estates that do not want to make a portability election. However, if the estate is obligated to file a Form 706 because the value of the gross estate exceeds the applicable exclusion amount, or it files a Form 706 for another reason, the executor must follow the instructions for Form 706 that will describe the necessary steps to avoid making the election.

Executors may request an automatic six-month extension to file Form 706 by filing Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, before the due date for filing Form 706. Notice 2011-82 says the IRS intends to issue regulations under Sec. 2010(c) to address issues arising with respect to the portability election and anticipates that those regulations will be consistent with the provisions of the notice.