Portability has been part of federal estate tax law since 2011. The portability election allows a decedent’s executor to transfer, or “port”, any unused estate tax exclusion to the decedent’s surviving spouse. Revenue Procedure 2017-34 issued on June 9, 2017 allows an executor up to two years to elect portability provided that no estate tax return is otherwise due. This procedure gives those executors an additional nine months to evaluate whether to make the election.
An executor must file an estate tax return when the sum of the decedent’s gross estate plus adjusted taxable gifts exceeds $5,490,000 (2017 law), which amount is indexed for inflation. The due date for filing an estate tax return is nine months from the decedent’s date of death, or fifteen months upon a timely extension request. Current federal regulations require that the decedent’s executor make the portability election on a timely filed estate tax return.
Revenue Procedure 2017-34 extends the due date to elect portability for estates below the threshold for filing a federal estate tax return. Under this procedure, an executor of a qualifying estate has until the later of January 2, 2018 or two years after the decedent’s date of death to file an estate tax return to elect portability. No ruling request or user fee is required.
A portability election may be made on an estate tax return filed within the extended period under Revenue Procedure 2017-34 if:
(1) The decedent was a U.S. citizen or resident;
(2) The decedent died after December 31, 2010;
(3) The decedent was survived by a spouse;
(4) The executor has not filed an estate tax return; and
(5) The value of the decedent’s gross estate plus adjusted taxable gifts does not exceed the filing threshold in effect at his or her death.
Portability is automatically approved upon filing a complete and properly prepared estate tax return that complies with this Revenue Procedure. For executors of an estate of a decedent dying after December 31, 2010 and before January 2, 2016, the filing deadline is now January 2, 2018. For executors of an estate of a decedent dying after January 2, 2016, the executor has two years, rather than fifteen months, to make the portability election. The surviving spouse does not have to survive the two years; the filing deadline is independent of the health of the surviving spouse.
The additional nine months may give the executor and surviving spouse additional time to weigh the cost of filing an estate tax return against the potential benefits of a portability election. An executor may decline to file an estate tax return if, for example, the surviving spouse dies within the two years and the aggregate value of the survivor’s estate is less than the allowable exclusion.
An executor may also defer making a qualified terminable interest property (QTIP) election for these two years, and make the election on the portability return. Treasury Regulations provide that a QTIP election is effective if made on the first filed return, even if filed late. Deferring that election gives the executor another nine months to determine whether marital trust assets have appreciated or depreciated since the decedent’s date of death, and whether a QTIP election will reduce or increase the overall estate tax burden.
The extended two-year period also may avoid the need for complicated trusts, if the surviving spouse is not a United States citizen. The need for those complex trusts is obviated if the surviving spouse becomes a citizen before the day on which estate tax return is filed. An executor can now wait two years to determine whether such trusts must be funded to qualify the gift to a non-citizen spouse to qualify for the estate tax marital deduction.
This deferral is not available if the executor is required to file an estate tax return or has already filed a return. An estate that otherwise meets the requirements of the Revenue Procedure and fails to file a return within the two-year period may still file a private letter ruling request seeking relief to file a late return. The Revenue Procedure does not apply to generation-skipping transfer tax (GST) allocations, and caution should be exercised if the decedent’s estate involves GST tax planning.
We would be pleased to discuss with you the post-mortem administrative and planning opportunities you may want to consider in light of this recent government pronouncement.