An Extension of the Portability of the Estate Tax Exemption - The Unger Company | Estate Tax Planning | New York, Manhattan, Long Island, NY

The IRS recently issued Revenue Procedure 2017-34, granting automatic relief provisions for those who failed to file a timely estate tax return in order to claim portability. However, this time around, the extension will remain available indefinitely in the future, as well.

Specifically, under Section 4.01(1) of Rev. Proc. 2017-34, any estate of a decedent who passed away after December 31st of 2010 is automatically granted an extension until January 2nd of 2018 to file the Form 706 estate tax return to claim portability. In addition, going forward, any executor will automatically have until the second anniversary of the decedent’s date of death to file an estate tax return for the purposes of claiming portability. (In the event that the decedent passed away in 2016 or 2017, where both options apply, the up-to-2-years option will supersede the January 2nd deadline, allowing the 2-year window to extend into 2018 or 2019.) In other words, in situations where the normal 9-month deadline (and 6-month extension) has passed for filing an estate tax return to claim portability, executors can automatically get an extension to the later of January 2nd of 2018, or 2 years after the decedent’s date of death. However, the automatic extension does not apply when an extension had to be applied for and was not.

In simple terms, portability of the federal estate tax exemption between married couples means that if the first spouse dies and the value of the estate does not require the use all of the deceased spouse’s federal exemption from estate taxes, then the amount of the exemption that was not used for the deceased spouse’s estate may be transferred to the surviving spouse’s exemption so that he or she can use the deceased spouse’s unused exemption plus his or her own exemption when the surviving spouse later dies.

Here’s a good example of what it looks like under the new ruling (credit: A May 2017 article in The Balance, a leading Web source of personal finance and career information.)

Assume Bob and Sue are married and have all of their assets jointly titled and their net worth is $8,000,000, Bob dies first and the federal estate tax exemption is $5,490,000 on the date of Bob’s death in 2017, and portability of the estate tax exemption between spouses is in effect:

$8,000,000 estate – $10,980,000 exemption = $0 taxable estate

As above, when Bob dies his estate will not need to use any of his $5,490,000 estate tax exemption since all of the assets are jointly titled and the unlimited marital deduction allows for the automatic transfer of Bob’s share of the joint assets to Sue by right of survivorship and without incurring any federal estate taxes.

Assume that at the time of Sue’s later death the federal estate tax exemption is still $5,490,000, the estate tax rate is 40%, and Sue’s estate is still worth $8,000,000. (The amount you can leave to heirs without facing federal estate tax is projected to top $11 million per couple in 2018–$5.6 million per person, according to Bloomberg BNA estimates, based on recently released inflation numbers as of September 15, 2017).

Enter portability of the estate tax exemption – Using the concept of portability of the estate tax exemption between spouses, under these facts Bob’s unused $5,340,000 estate tax exemption will be added to Sue’s $5,340,000 exemption, in turn giving Sue a $10,500,000 exemption.

Since Sue has “inherited” Bob’s unused estate tax exemption and she can pass on $10,680,000 free from federal estate taxes at the time of her death, Sue’s $8,000,000 estate will not owe any federal estate taxes at all:

Thus, portability of the estate tax exemption will save the heirs of Bob and Sue about $1,064,000 in estate taxes.

Note that Sue will not automatically “inherit” Bob’s unused exemption; instead, she must timely file IRS Form 706, United States Estate and Generation Skipping Transfer Tax Return in order to make an affirmative election to add Bob’s unused exemption to her exemption. See Rev. Proc. 2014-18 for special rules that apply to the estates of married decedents who died after December 31, 2010, and on or before December 31, 2013.

It is good to note that according to the statement issued by the IRS in June 2017: In order to claim the extension – for executors who are filing past the normal 9-month deadline – Section 4.01(2) of the guidance stipulates that the executor should simply write “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILTIY UNDER 2010(c)(5)(A)” at the top of Form 706. There is no user fee or other cost to making and being granted the request for extension (beyond the cost of assistance in filing a Form 706 in the first place).

Notably, though, these rules for getting an automatic extension apply only where the decedent was:

1. Survived by a spouse,
2. Died after December 31st of 2010,
3. Was a US citizen (or resident) on the date of death,
4. Not required to file an estate tax return in the first place (i.e., was under the filing threshold); and,
5. Did not already file an estate tax return (as if Form 706 was already filed, portability either was or wasn’t already claimed!)

As with most things related to the IRS, it’s complicated. So the best thing you can do for yourself and your family, is have the best possible estate planner working with you to make sure you, your spouse, and family are well taken care of through insurance and other estate planning tactics.