“Portability” is the ability of a surviving spouse to use not only his or her own estate tax exemption, but also some or all of the exemption of the first spouse to die, as long as the first spouse died in 2011 or later. With the estate tax exemption for 2017 at $5,490,000, this can allow estates of nearly $11,000,000 to escape estate tax. While a full discussion of portability is beyond the scope of this post, suffice it to say that portability can save the day in one or more of these situations: if proper estate planning has not been done, if life insurance, IRAs or retirement plans left to the surviving spouse constitute a very large portion of a couple’s assets, or if a couple’s assets of any type are worth near the value of one exemption but less than both (e.g., $4,500,000 to $10,500,000).
The catch is that if the deceased spouse’s assets are worth less than his or her exemption amount, the deceased spouse’s executor has to file a federal estate tax return (Form 706) for the deceased spouse to “claim” the deceased spouse’s unused exemption and thus invoke “portability.” This is the direct opposite of the normal rule that if a decedent’s estate is worth less than the estate tax exemption amount (after taking lifetime gifts into account), no estate tax return filing is necessary. But if the deceased spouse’s executor does not file a timely estate tax return for the deceased spouse (nine months after the date of death, or an additional six months thereafter if a request for an extension was properly filed by the nine month deadline), the ability to use portability is permanently lost.
After portability first came into law in 2011, many deceased spouses’ executors missed this deadline. The IRS was flooded with costly and cumbersome private letter ruling requests for relief from missing the deadline. “I didn’t know” was the usual refrain. In 2014, the IRS issued Revenue Procedure 2014-18, giving the estate of any decedent who died in 2011, 2012, 2013 or 2014 until December 31, 2014 to file an estate tax return and elect portability, even if the initial filing deadline was missed. The IRS thought that this would be sufficient to stem the tide of “I didn’t know” private letter ruling requests, but in fact, the tide increased dramatically, inundating the understaffed IRS estate tax division.
To cut down, if not cut off, the need for these rulings, on June 12, 2017, the IRS issued Revenue Procedure 2017-34. Under this Revenue Procedure, any decedent’s estate which meets the following requirements can claim portability by filing an estate tax return on or before the later of January 2, 2018 or two years after the first spouse’s death:
- The decedent was a U.S. citizen or resident;
- The decedent was survived by a surviving spouse;
- The decedent died in 2011 or a later year
- The decedent’s gross estate plus adjusted taxable gifts were such that the decedent was not required to file an estate tax return (and in fact did not file one); that is, the decedent’s executor missed the original deadline to claim portability.
The January 2, 2018 portion of the deadline gives estates of decedents who died in 2011-2016 one last chance to claim portability. The “two years after the decedent’s death” portion of the deadline gives current and future estates the chance to miss the deadline by as much as fifteen months and still claim portability. The IRS rejected calls for an unlimited extension of time on several grounds, including that it would not be fair to the government to have to analyze valuations of estate assets many years after the death of the first spouse.
In the end, IRS gave a second (or third) bite at the apple to “I didn’t know” surviving spouses and their advisors to claim the benefits of the first spouses’ unused estate tax exemption amounts.