The Estate Tax Portability Triple Mulligan

By Jean McDevitt Bullens August 3, 2017

(Revenue Procedure 2017-34 Extends Portability again for Late Filers)

With the issuance of Revenue Procedure 2017-34, the IRS very recently expanded the ability to elect portability for a spouse’s unused estate tax exemption, potentially preserving significant tax savings for a surviving spouse who otherwise might pay dearly for a seemingly minor oversight in filing an estate tax return. In addition to providing an “out” for those who have done nothing, the new method also requires action of those who recently tried to obtain portability via a Private Letter Ruling, but have not yet received an IRS response.

Background/relevance

Estate tax generally is assessed on the value of a deceased person’s assets as of the date of death, but only on the portion of that value that exceeds a specific exclusion amount after accounting for certain available deductions. That exclusion amount is indexed for inflation, but for 2017 that amount is (and for purposes of this discussion will remain at) $5.49 million. An important exception in the estate tax law allows the value of assets left to a surviving spouse to avoid being taxed upon the first death.

The surviving spouse will upon later death be entitled to his or her own $5.49 million exclusion amount, but can better that position using the relatively new concept of “portability.” Portability refers to the ability of the second-to-die spouse to utilize any unused portion of the exclusion amount that was available at the death of the first spouse. This allows that second-to-die spouse to see as much as $10.98 million of value shielded from estate tax. Depending on their total estate values, this feature may be very significant.

The catch is that portability is elected only by the timely filing of IRS Form 706, U.S. Estate Tax Return, and only estates with gross asset values exceeding the exclusion amount are required to file Form 706. In situations where the first spouse’s asset values are less than $5.49 million, but the second spouse’s values (including value inherited from the first spouse) are expected to exceed $5.49 million, this forces the first spouse’s representative to file what might otherwise be an unnecessary return just to make the election, or risk overpaying tax when the second spouse dies. The filing of Form 706 solely for this purpose is often overlooked. To prevent inadvertent loss of portability, the IRS rolled out some methods that allow a late filing of Form 706 to be deemed timely for purposes of making this election.

The first two mulligans

In early 2014, the IRS announced a simplified method of belatedly requesting an extension of time to file a Form 706 for purposes of this election. That extension applied only to deaths in 2011-2013, though, and since then, the only recourse has consisted of what could be referred to as groveling to the IRS, in the form of a Private Letter Ruling (“PLR”). A PLR request is a long, formal letter drafted in a very specific format, accompanied by an IRS user fee (and often accountant or attorney fees), which is followed by a lengthy waiting period and no assurance of success.

The current mulligan

In response to the blizzard of PLR requests it received since 2014, the IRS this summer issued Notice 2017-34, providing another temporary, but greatly simplified method of making an otherwise late portability election. It states that PLRs are not required if a complete Form 706 is filed on or before the later of (1) the second anniversary of the (first-to-die) spouse’s date of death or (2) January 2, 2018. Form 706 must include a written statement stating that the return is “FILED PURSUANT TO REV PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).”

Any PLR requests filed but still pending as of June 9, 2017 will not be honored, and the IRS will refund any related user fees. Rev. Proc. 2017-34 therefore both allows and forces some executors to make the election pursuant to the new method, even if they went through the effort of writing the ruling request.

Note that this election is available only for returns that were not otherwise required to be filed (because asset values did not exceed $5.49 million). If it is later determined that the values exceeded that threshold, the return is not only late, but the portability election is null and void.

Conclusion

It is not uncommon for executors or even some general tax practitioners to be familiar enough with estate tax requirements to know that a return is not required, but be unaware that it may be advisable to file anyway to preserve portability. With estate tax rates currently as high as 40%, this could be a very costly error. Notice 2017-34 may prove to be a valuable tool to prevent or at least minimize estate tax on the death of the second spouse.

Jean McDevitt is a principal at Baker Newman Noyes who specializes in income and estate tax planning and compliance. If you have any questions regarding portability elections, please contact her at 800.244.7444