Time is running out for the extension to make portability election by surviving spouses of individuals who died after 2010. So far the IRS has been extremely lenient in allowing taxpayers relief for failing to timely make the required election to save any unused exclusion. For couples with assets of $11 million dollars the election could save their heirs over $2 million dollars.
In 2010 the federal estate tax exclusion was increased to $5,000,000 per person (with indexing currently $5.49 million dollars.) Although the exclusion is often reported as $11 million per married couple, in order for the surviving spouse to use their spouse's unused exclusion to get to the total of $11 million per couple, a timely "portability" election is required to be made. The election is called a Deceased Spouses Unused Exclusion election (DSUE). The election is made on a federal estate tax return filed within 9 months of the decedent's death. If a timely return is not filed, any of the decedent's exclusion not used is lost and could result in federal estate tax being due on the spouse's death. For decedent's that provide for all assets to pass to their surviving spouse, none of their exclusion is used.
A number of taxpayers failed to timely file the required tax return to make the election and requested relief from the IRS to allow an extension of time to file the return. After dealing with a number of such requests, in February 2014 the IRS issued a Revenue Procedure that provided a simplified method for obtaining an extension of time to make the portability election in the situation where an estate was not required to file an estate tax return and the decedent was survived by a spouse. This simplified method was available only on or before December 31, 2014. After 2014 the IRS received a number of requests for letter ruling (applicable only to the involved taxpayer) requesting late election relief for the portability or DSUE election.
In June this year the IRS issued a new Revenue Procedure that made a simplified method available for all eligible estates through January 2, 2018, or the second anniversary of the decedent's date of death. The Revenue Procedure specifically explains why the relief was not made as a permanent and unlimited extension.
For surviving spouses of decedents who died after 2010 who have total assets in excess of $5.49 million or are close to that amount and have the potential of appreciation of their assets, the filing of the required return within the allowed extended time period could result in substantial tax savings for their heirs.
The tax cut bill introduced in Congress this week contains a provision to increase the federal estate tax exclusion to $10 million per person effective January 2018. If that provision is enacted those with estates between $5million and $10 million would then not need to worry about this election as the increase in the federal estate tax exclusion would cover their assets, assuming the change is made permanent. Of course since there are multiple proposals being reviewed, each with different time frames for changes to the federal estate tax, it won't be clear until any changes are enacted to know what changes may actually be enacted or how long they will remain in effect.
Given all of the unknowns, those who qualify for the extension of time to make this election and have assets close to or above $5 million should consult with their tax advisor about whether filing the required tax return makes sense for them.
Should you have any questions about the DSUE election or about portability provisions for federal estate taxes or other issues related to federal estate taxes, please contact our office.