In June of this year, the IRS published a revenue procedure that allows certain estates to make a late portability election if a timely election was not made. Rev. Proc. 2017-34. The portability election allows a decedent’s unused basic exclusion amount (known as the deceased spousal exclusion amount, or DSUE) to be transferred to the surviving spouse for his or her use during life or at death. In effect, this allows married couples to double the amount of assets they can shelter from federal estate and gift taxes.
In order to make a portability election, the personal representative of the estate of the first spouse to die must file a timely (including extensions) federal estate tax return (Form 706) following the death of the first spouse, even if the estate of the first spouse to die is not otherwise required to file Form 706. For example, if a decedent’s assets and lifetime adjusted taxable gifts do not exceed a certain amount (in 2017 the amount is $5.49 million), a 706 is not required. Many taxpayers, not knowing the rules and not otherwise required to file Form 706, fail to make the portability election timely.
In January of 2014 the IRS had issued Rev. Proc. 2014-18, which provided an automatic extension for certain estates of decedents dying after December 31, 2010 and on or before December 31, 2013 to elect portability of the DSUE by filing Form 706. However, after December 31, 2013, the only way to make a late portability election was to seek a private letter ruling from the IRS pursuant to Treasury Regulations. Despite the fact that private letter rulings can be time-consuming and expensive, the Service has issued many such rulings in the last few years by estates seeking to make a late portability election. Hence the new revenue procedure provides a welcome and lest costly method for preserving the DSUE.
A portability election is usually recommended even if the surviving spouse’s assets do not exceed the federal estate and gift tax exemptions, because it is not possible to predict whether assets will increase in value or what the tax laws will be at the time of the surviving spouse’s death. In order to make the late election pursuant to Rev. Proc. 2017-34, certain requirements must be met, the primary one being that a complete and properly prepared Form 706 must be filed by the later of January 2, 2018 and the second anniversary of the decedent’s death.