Estate tax rules can be tricky for executors, especially when dealing with provisions they may have to face only once in a lifetime. A case in point is the portability of the deceased spousal unused exclusion (DSUE) amount, which, if elected, allows the estate exclusion amount ($5.49 million in 2017) to pass from a deceased spouse to the surviving spouse.
To make the exclusion portable, the executor must timely file an election. What happens if the executor, unaware of the necessity of the election, misses the filing? Fortunately, there may be relief. The rules for applying for this relief have changed again under Rev. Proc. 2017-34.
A brief history of the estate tax exclusion
Few taxes have caused as much debate as the estate tax. For years it has served as a lightning rod for tax reform, with those objecting to it calling it a form of double taxation, while defenders point to the tax revenue it generates and the oversized fortunes that pass from generation to generation.
In an attempt to lessen the blow of the estate tax, Congress long ago added an exclusion, allowing anything below that exclusion amount to be passed down to the next generation tax-free. This compromise has generally worked as long as both sides of the political spectrum were content with the size of the exclusion amount.
That "just right" exclusion amount has been a moving target. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, P.L. 107-16, put the exemption on a continuing growth chart from 2001 through 2010, when the exclusion amount in effect became unlimited. Then, in 2011, the exclusion was scheduled to drop to $1 million after EGTRRA's sunset.
Neither side of the political spectrum was happy with this cliff, so Congress addressed the issue in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (Tax Relief Act) of 2010, P.L. 111-312. The exclusion amount was set at $5 million plus annual inflation adjustments (after 2011), with the hope that this would prevent future fighting over the exclusion amount.
To make the $5 million exclusion even more palatable to those opposed to the estate tax, Congress temporarily passed, then later made permanent, a provision allowing any unused exclusion of a decedent to pass to a surviving spouse. This portability of the DSUE amount effectively allows a couple to pass up to $10 million (plus inflation) to their heirs tax-free.
Rules regulating exclusion portability to the surviving spouse are found in Sec. 2010(c)(5)(A), which states:
Election required. A deceased spousal unused exclusion amount may not be taken into account by the surviving spouse . . . unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return.
In other words, for DSUE portability to be claimed, the executor must elect portability on the deceased spouse's estate tax return.
The IRS, thankfully, has made electing portability easy. If the executor timely files the decedent's Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which generally is due nine months after the decedent's date of death, portability is automatically elected. If a return is timely filed, to decline to make or not be considered to have made a portability election, the executor must make an affirmative statement to that effect on the return or an attachment, which few executors will choose to do.
Extension of the portability election
Executors are most likely to run into problems if Form 706 is not timely filed. Under Regs. Sec. 20.2010-2(a)(1), estates electing portability are considered to be required to file Form 706 under Sec. 6018(a), with a due date of nine months after the decedent's death or the last day of any period covered by an extension obtained under Regs. Secs. 20.6075-1 and 20.6081-1.
The rules for missed elections go down two possible paths. Path A is followed by those who are required to file Form 706 under Sec. 6018(a) without regard to Regs. Sec. 20.2010-2(a)(1). In this situation, no further extension is available under Regs. Sec. 301.9100-3. In other words, if the executor was required to file a Form 706 under Sec. 6018(a) without regard to portability within nine months of the decedent's death (plus any period covered by an extension other than under Regs. Sec. 301.9100-3) but failed to do so, a portability election is not allowed.
Executors who did not timely file a Form 706 and the portability election who were not required to file Form 706 under Sec. 6018(a) may go down Path B, which allows extension relief.
Rev. Proc. 2014-18, issued in February 2014, provided a simplified method for executors on Path B to extend the filing period for portability under Regs. Sec. 301.9100-3 for estates of decedents who died between Dec. 31, 2010, and Dec. 31, 2013, which was available until Dec. 31, 2014. After that, executors seeking relief had to use the letter ruling process. Consequently, the IRS was flooded with private letter ruling requests for portability extension relief, most of which came from executors who did not discover the need to file for the portability election until the surviving spouse passed away. Due to the large influx of letter ruling requests, the IRS again decided to allow a simplified method of extending the election and did so in Rev. Proc. 2017-34, issued in June 2017.
Extensions under the new simplified method
Under Rev. Proc. 2017-34, if an executor missed the original election date and was not required to file Form 706 under Sec. 6018(a) without regard to the portability election, for decedents dying after Dec. 31, 2010, the executor may file a complete and properly prepared Form 706, by Jan. 2, 2018, or the second anniversary of the decedent's death, whichever is later, to obtain an extension of time to elect portability. The return must include a note at the top stating that it is "filed pursuant to Rev. Proc. 2017-34 to elect portability under Sec. 2010(c)(5)(a)." No user fee is required.
Rev. Proc. 2017-34 also notes that this portability extension relief does not extend the period available to the surviving spouse or surviving spouse's estate to claim a credit or refund for the overpayment of taxes under Sec. 6511(a). It also does not extend the time the surviving spouse's estate has to file a Form 706 upon the surviving spouse's death. However, if the claim for credit or refund on the surviving spouse's return is filed within the time required by Sec. 6511(a) in anticipation of the decedent spouse's executor's making a late portability election, it will be considered a protective claim for credit or refund of tax.
If, subsequent to the grant of relief under the simplified method, it is determined that, based on the value of the gross estate and taking into account any taxable gifts, an executor of an estate was required to file an estate tax return for the estate under Sec. 6018(a), the grant of an extension under the simplified method is deemed null and void ab initio.
If the decedent passed away on or after Jan. 1, 2011, and the executor missed electing portability of the DSUE due to not being otherwise required to file a Form 706, extension relief is available under Rev. Proc. 2017-34. However, this relief will soon disappear for estates of decedents who died before Jan. 2, 2016, leaving the private letter ruling process as the only recourse for their executors.
Mark G. Cook is the lead tax partner with SingerLewak LLP in Irvine, Calif.
For additional information about these items, contact Mr. Cook at 949-261-8600 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with SingerLewak LLP.