Estates, Trusts & Gifts
On Jan. 27, 2014, the IRS issued Rev. Proc. 2014-18, which provides an automatic extension for certain taxpayers to elect portability of the deceased spousal unused exclusion (DSUE). The new simplified procedure means that qualifying estates that failed to make the election on a timely filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return , will no longer be required to submit a ruling request seeking relief under Regs. Sec. 301.9100-3. The new procedure is available if the decedent was a U.S. citizen or resident who died after Dec. 31, 2010, and before Jan. 1, 2014, and the value of the estate did not require filing Form 706. For qualifying estates, the portability election can now be made by filing Form 706 on or before Dec. 31, 2014.
In general, Sec. 2010(c) allows the estate of a decedent who is survived by a spouse to make a portability election, and Sec. 2010(c)(5)(A) requires the election to be made on a Form 706 filed within the time prescribed by law (including extensions). However, some taxpayers were unaware Form 706 was required to elect portability when the value of the estate did not require filing a return. For estates not required to file a Form 706, Regs. Sec. 301.9100-3 provides the rules for granting an extension of time to elect portability. Prior to the revenue procedure, a letter ruling request was always required to obtain an extension of time to make the election. Due to the large number of ruling requests it received, the IRS issued Rev. Proc. 2014-18 to make the procedure less burdensome.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 , P.L. 111-312, introduced the concept of the portability of the federal estate tax exclusion between married couples for the 2011 and 2012 tax years. Later, the American Taxpayer Relief Act of 2012, P.L. 112-240, made portability of the exclusion between married couples permanent for 2013 and future years. With portability, an unused applicable exclusion amount may be transferred to a decedent's surviving spouse and applied with the surviving spouse's own exclusion to transfers during life and at death.
Example 1: A and B are married U.S. citizens with all their assets titled as joint tenants with right of survivorship, and their net worth is $10 million. A , having made no taxable gifts in his lifetime, dies in 2013, when the estate tax exclusion is $5,250,000.
1. A' s estate does not need to use any of his $5,250,000 estate tax applicable exclusion since all of the assets are jointly titled and the unlimited marital deduction allows A' s share of the joint assets to be automatically transferred to B by right of survivorship without incurring any federal estate taxes.
2. B makes no taxable gifts and dies in 2014, when the estate tax exclusion is $5,340,000 and the net worth of her estate remains $10 million. With portability, A' s unused $5,250,000 estate exclusion is added to B' s $5,340,000 exclusion, giving B a $10,590,000 exclusion and, thus, no liability for federal estate tax.
Without portability (e.g., if A' s estate had not made a proper portability election on a timely filed estate tax return), A' s unused estate tax exclusion would have been lost, and B would have a taxable estate of $4,660,000 ($10 million ‒ $5,340,000) and federal estate tax of $1,864,000 at the current 40% rate.
Qualifying for the Extension
To qualify for the automatic extension, a taxpayer must meet the following requirements:
- The taxpayer is the executor of the estate of a decedent who (a) has a surviving spouse; (b) died after Dec. 31, 2010, and on or before Dec. 31, 2013; and (c) was a citizen or resident of the United States on the date of death;
- The taxpayer is not required to file an estate tax return under Sec. 6018(a) (i.e., the gross estate does not exceed the basic exclusion amount, as determined based on the value of the gross estate and adjusted taxable gifts, without regard to the requirement under Temp. Regs. Sec. 20.2010-2T(a)(1) to file an estate tax return to elect portability);
- The taxpayer did not file an estate tax return within the time prescribed by the temporary regulation for filing an estate tax return to elect portability;
- A person permitted to make the election on behalf of the decedent, pursuant to Temp. Regs. Sec. 20.2010-2T(a)(6), files a complete and properly prepared Form 706 on or before Dec. 31, 2014; and
- The person filing the Form 706 on behalf of the decedent's estate states at the top of the Form 706 that the return is "Filed Pursuant to Rev. Proc. 2014-18 to Elect Portability Under §2010(c)(5)(A)" (Rev. Proc. 2014-18, §§3.01 and 4.01).
The revenue procedure does not apply to taxpayers who filed an estate tax return within the time prescribed by Temp. Regs. Sec. 20.2010-2T(a)(1) for the purpose of electing portability. Those taxpayers either will have elected portability of the DSUE amount by timely filing that estate tax return or will have affirmatively opted out of portability in accordance with Temp. Regs. Sec. 20.2010-2T(a)(3)(i) (Rev. Proc. 2014-18, §3.02). Taxpayers who are not eligible for relief under the revenue procedure because they do not meet the requirements or are outside the scope of the revenue procedure because the decedent died after Dec. 31, 2013 (if the due date to elect portability is under Temp. Regs. Sec. 20.2010-2T(a)(1) and not Sec. 6018(a) ), may request an extension of time to make the portability election under Sec. 2010(c)(5)(A) by requesting a letter ruling under Regs. Sec. 301.9100-3 (Rev. Proc. 2014-18, §3.03).
Limitation Period for Claim for Credit or Refund by Surviving Spouse
It is important for estates that incurred estate tax as a result of not making a portability election to be aware of the statute of limitation for credit or refund claims. Generally, under Sec. 6511(a) , a taxpayer's claim for credit or refund of an overpayment of tax must be filed within three years from the date of filing the tax return or within two years from the date of payment of the tax, whichever period expires later. Accordingly, to obtain a credit or refund of an overpayment of tax by reason of a portability election under the revenue procedure, the surviving spouse (or the executor of the estate of the surviving spouse) of the decedent must file a claim for credit or refund of tax before the expiration of the limitation period in Sec. 6511(a) (Rev. Proc. 2014-18, §5.01).
Example 2: Predeceasing spouse ( S1 ) dies on Jan. 1, 2011, survived by U.S. citizen surviving spouse ( S2 ). The assets includible in S1 's gross estate consist of cash on deposit in bank accounts held jointly with S2 with rights of survivorship in the amount of $2 million. S1 made no taxable gifts during his life. S1 's executor is not required to file an estate tax return under Sec. 6018(a) , and does not file one. S2 dies on Jan. 14, 2011. S2 's taxable estate is $8 million, and S2 made no taxable gifts during her life. S2 's executor files a Form 706 on behalf of S2 's estate on Oct. 14, 2011, and includes payment of the estate tax on the $3 million in excess of S2 's applicable exclusion amount. Pursuant to the revenue procedure, S1 's executor files a Form 706 on behalf of S1 's estate on Nov. 1, 2014, reporting a DSUE amount of $5 million. In 2015, the IRS (1) determines that S1 's estate has met the requirements for a grant of relief under this revenue procedure and is deemed to have made a valid portability election; (2) accepts S1 's return with no changes; and (3) issues an estate tax closing letter to S1 's estate.
To recover the estate tax paid, S2 's executor must file a claim for credit or refund of tax by Oct. 14, 2014, even though a Form 706 to elect portability has not been filed on behalf of S1 's estate at that time. Such a claim filed in anticipation of the filing of the Form 706 by S1 's executor will be considered a protective claim for credit or refund of tax. Accordingly, as long as the claim of S2 's estate for credit or refund of tax is filed by Oct. 14, 2014, the IRS can consider and process that claim for credit or refund of tax once S1 's estate is considered to have elected portability pursuant to the revenue procedure (Rev. Proc. 2014-18, §5.02).
Application to Same-Sex Spouses
In addition to providing relief for small estates that missed the portability election, the revenue procedure provides relief for same-sex spouses who did not make the election because the marriage was previously not recognized by the IRS. After the Supreme Court invalidated Section 3 of the Defense of Marriage Act, P.L. 104-199, in Windsor , 133 S. Ct. 2675 (2013), the IRS issued Rev. Rul. 2013-17, concluding that the terms "husband and wife," "husband," and "wife" should be interpreted to include same-sex spouses. Affected taxpayers are able to rely on Rev. Rul. 2013-17 for the purpose of filing original or amended returns. Accordingly, executors of estates of decedents with a surviving same-sex spouse will also be able to use Rev. Proc. 2014-18 to make a portability election for the estate if the requirements in the revenue procedure are otherwise met.
Kevin Anderson is a partner, National Tax Office, with BDO USA LLP in Bethesda, Md.
For additional information about these items, contact Mr. Anderson at 301-634-0222 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with BDO USA LLP.