IRS Extends Time for Electing Estate Tax Portability

February 18, 2014

Before 2011, the estate tax exemption was a use-it or lose-it proposition. The first spouse to die often gave property to a trust, which provided income and principal distributions to the surviving spouse.  This is the classic unified credit shelter trust or AB trust featured in estate plans for many years. Beginning January 1, 2011, a surviving spouse can elect to carry over the unused estate tax exemption of the deceased spouse and use it when the second spouse dies. This is known as “portability.” The current exemption is $5,340,000 for deaths in 2014. If one spouse dies in 2014 and the other spouse elects “portability” of that spouse’s unused exclusion, the second spouse could shelter as much as $10,680,000 from federal estate tax at death.

Portability is not automatic and must be made on a timely-filed estate tax return, Form 706. The return is due nine months from the date of death, with one six-month extension. In Rev. Proc. 2014-18, published on February 10, 2014, the IRS extended the time for filing Form 706 to elect portability until the end of 2014 for deaths in 2011, 2012, or 2013. To qualify for the extension, there must be a surviving spouse, the decedent must have been a citizen or resident of the United States at the time of death, and must not otherwise have been required to file an estate tax return. Under these circumstances, a return can be filed by December 31, 2014, and the Form 706 must say at the top “Filed Pursuant to Rev. Proc. 2014-18 to Elect Portability Under Sec. 2010(c)(5)(a).”

As Rev. Proc. 2014-18 points out, this will be of particular interest to same-sex couples whose marriages will be recognized for federal tax purposes under the Supreme Court’s decision of United States v. Windsor. Even though Windsor took effect on September 16, 2013, the IRS ruled that it would apply to any open years where amended returns could be filed. Therefore, if one spouse in a same-sex marriage died in 2011, 2012, or 2013, there is a new opportunity for the survivor to elect portability by the end of 2014.

Additional chances to make tax elections after deadlines pass are few and far between, so any surviving spouse who did not or could not elect portability should give some thought to taking advantage of this new revenue procedure.

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