It’s Not Too Late for Small Estates to Make a Portability Election
Revenue Procedure 2014-18 provides a simplified method for certain taxpayers to obtain an extension of time to make a portability election under which a decedent’s unused exclusion amount (that is, the deceased spousal unused exclusion amount, or DSUE amount) becomes available to apply to the surviving spouse’s subsequent transfers during their life or at death.
The concept of portability was introduced with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which amended the tax code to allow the estate of a decedent who is survived by a spouse to make a portability election, which allows the surviving spouse to apply the decedent’s DSUE amount to the surviving spouse’s own transfers during life and at death. The portability election applies to estates of decedents dying after Dec. 31, 2010, if the decedent was survived by a spouse.
These portability provisions were originally scheduled under the 2010 law to expire on January 1, 2013, but the American Taxpayer Relief Act of 2012 made the portability election permanent. The exclusion amount used to determine the credit amount has been defined as the sum of the basic exclusion amount and, in the case of a surviving spouse, the DSUE amount. The basic exclusion amount is $5 million, as adjusted for inflation in each year after 2011. The DSUE amount is the lesser of either the basic exclusion amount, or the excess of the applicable exclusion amount of the last deceased spouse of the surviving spouse over the amount with respect to which the tentative tax is determined for the estate of the deceased spouse. The surviving spouse can then use the DSUE amount, with some restrictions with his or her remaining exclusion amount to make gratuitous transfers during life and at death before being subject to federal gift and estate tax.
There are some requirements that the executor of the estate of a deceased spouse must satisfy to allow the surviving spouse to apply the decedent’s DSUE amount to the surviving spouse’s transfers. In particular, the executor of the estate of the deceased spouse must elect portability of the DSUE amount on a Form 706, which must include a computation of the DSUE amount. A portability election is effective only if it is made on a Form 706 filed within the time prescribed by law, including extensions.
The due date of an estate tax return required to elect portability is nine months after the decedent’s date of death, or the last day of the period covered by an extension, if an extension of time for filing has been obtained from the IRS. The revenue procedure applies only if the taxpayer is the executor of the estate of a decedent who:
- the decedent has a surviving spouse;
- the decedent died between January 1, 2011 and December 31, 2013;
- the decedent was a U.S. citizen or resident on his or her date of death;
- the estate is not required to file Form 706 based on the value of the gross estate and adjusted taxable gifts; and
- the estate did not file Form 706 within the nine-month deadline (or the extension, if one was obtained).
Rev. Proc. 2014-18 provides a cost-efficient method to elect portability for those taxpayers who didn’t have sufficient information to make the election timely and were not otherwise required to file an estate tax return. In addition, this relief will affect the estates of decedents who were in same-sex marriages and couldn’t have filed an estate tax return to elect portability until the aftermath of the Supreme Court’s decision in Windsor.
It should be noted that Rev. Proc. 2014-18 doesn’t provide relief when the executor was required to file an estate tax return because the size of the gross estate with adjusted taxable gifts exceeded the decedent’s exclusion amount or when the executor filed an estate tax return timely but failed to elect portability.
