You have until January 2, 2018 to file your portability election. What does that mean and why is it important?
If your spouse or one of your parents died after December 31, 2010 and no federal estate tax return was filed for their estate, you may be missing out on an opportunity to protect over $5 million dollars from federal estate taxes.
Under the federal gift and estate tax laws, every person has the ability to pass a certain amount of assets to anyone else during life (via gift in excess of $14k per year) or at death (via their estate) without being subjected to a gift or estate tax. This exclusion amount, (sometimes referred to as an ?exemption? or the ?unified credit?) has increased dramatically over the past few decades in response to the calls for estate tax law repeal. The exclusion amount was $600,000 during most of the ?90?s and after gradually increasing earlier last decade was set at $5,000,000 in 2011.
To allay future calls for repeal, two additional concepts were included in the new law: first, the exclusion amount was indexed for inflation so that it is now $5,490,000 for 2017 and, second, the exclusion amount became portable.
Portability means that if one spouse dies and does not use his or her entire exemption amount, the surviving spouse can still have the benefit of that unused exclusion amount on his or her death. This was a radical departure from the estate tax law of the past because the exclusion amount was a ?use it or lose it? proposition. Previously, if one spouse held $10,000,000 of assets in his or her name and the other spouse died first with no assets, then on the surviving spouse?s subsequent death the value of the assets over the exemption amount would be subject to estate taxes. A $10,000,000 estate would be subject to an estate tax in the neighborhood of $2,500,000.
With the advent of portability, however, that same couple is able to shelter the full $10,000,000 because the exclusion amount of the first spouse to die is available to the surviving spouse.
In order to claim what is now referred to as the ?deceased spousal unused exclusion? (DSUE) amount, the estate of the first spouse to die must file a ?timely filed? estate tax return, including extensions, for no other reason than to claim the DSUE. Before portability, if a person died with an estate that was not over the exclusion amount, an estate tax return was not required. This may explain why no estate tax return was filed for your spouse or parent.
As time passed people began to realize that the DSUE amount was only available if they filed a timely filed estate tax return meaning within nine months after death or 15 months if the automatic 6-month extension is requested. When people realized the filing deadline had passed, their only option was to file a Private Letter Ruling request with the IRS which came at great expense; the filing fee alone approached $10,000. The benefit however is well worth it.
After being inundated with countless identical Private Letter Ruling requests, the IRS recently issued Revenue Procedure 2017-34 which provides for a simplified method to grant relief to estates that have missed their filing deadline. This simplified method requires the executor to complete and file a properly prepared estate tax return on or before the later of January 2, 2018, or the second annual anniversary of the decedent?s date of death.
There are several other requirements as well but the Bottom Line is that estates of people that died between 2011 and 2015 can obtain relief under this streamlined Revenue Procedure instead of by filing a Private Letter Ruling request. It also extends the time to file for certain estates that may have missed their filing deadlines but have not yet exceeded the 24-month period; i.e. estates of decedents who died more than 15 months but less than 24 months prior to the date you are reading this article.
If you have any questions about the DSUE please contact Attorney Neil Cohen of Seegel Lipshutz & Lo, LLP at firstname.lastname@example.org.