Passing on Your Lifetime Exclusion: Lessons From Rowland v Commissioner

The IRS allows taxpayers to elect portability, meaning they may transfer or “port” the unused amount of a decedent’s lifetime exemption ($15 million in 2026) to the surviving spouse. To make this election, the estate must file a Form 706 within nine months of death. If the return is not filed within nine months, it may still qualify for a 6-month extension, but only if the return is properly prepared. This is important because the reporting standards that normally apply only to taxable estates also apply to estates seeking portability. In comparison, an estate filing within the nine-month period may estimate the fair market value for assets needed to calculate non-marital or non-charitable transfers; however, that flexibility disappears.

Rowland involved two central errors: the filing was late, and the estate tax return was incomplete. The estate filed its Form 706 roughly twenty months after the date of death without securing an extension.

The Form 706 in Rowland did not contain enough information to satisfy the reporting requirements. In practice, a complete return must identify the assets and provide a good-faith estimate of fair market value. Although some exceptions exist, such as for property passing entirely to a spouse or charity, those exceptions do not apply when the value is relevant to determining what passes to other beneficiaries, when it affects another estate or a generation-skipping transfer calculation, when less than the full interest is transferred to the spouse or charity, or when a QTIP election is used. Because the estate in Rowland did not identify or value property that fell outside the exception, the filing was deemed incomplete, and the portability election was denied.

Although a valuation is not always required, a qualified appraisal generally satisfies the adequate disclosure rules. Without meeting the adequate disclosure standard, the IRS may review the estate’s positions indefinitely. Meeting the standard, however, starts a three-year statute of limitations on IRS review. The fact that the IRS and Tax Court are willing to revoke portability entirely if a return is insufficient creates a strong incentive to follow the disclosure rules. The risk is not limited to a future revaluation. Instead, it includes the possibility of losing the entire portability amount if the court determines that the return is lacking. This can trigger a significant and unexpected tax bill years later if the three-year clock never begins due to inadequate disclosure.

Rowland demonstrates that portability can be lost through untimely filing or failure to meet the reporting standards required by the IRS. The IRS is not required to notify taxpayers that a filing was deficient, which means a surviving spouse may not become aware of the problem until much later. Adequate disclosure helps protect the estate by starting the statute of limitations and limiting the IRS’s ability to challenge the return in the future. Furthermore, fulfilling the requirements of adequate disclosure will, de facto, result in a complete Form 706. In many cases, obtaining a qualified appraisal not only reduces valuation risk but also helps ensure the estate meets the disclosure requirements and avoids unexpected tax consequences for the surviving spouse.

Author: Ross Slutsky, ASA | [email protected]