The IRS has provided relief for persons who missed the opportunity to make a "portability election." To understand the importance of the relief, a review of the basics is in order.
The Tax-Free Amount
Each person has an amount that can be given at death without incurring federal estate taxes. In 2014, this estate-tax-free amount is $5,340,000 per person (or a combined $10,680,000 for married couples). However, the estate tax does not normally apply to amounts given to a spouse or to a charity. For example, a will that leaves everything to a spouse will not trigger estate tax at the death of the first spouse to die (the "deceased spouse"). Because a gift to a spouse does not trigger tax, it will not use up any of the tax-free amount of the deceased spouse. This may cause a potential estate tax problem on the death of the surviving spouse because the surviving spouse has become the owner of all the property but may only be able to apply his or her own tax-free amount as an offset.
Portability of the Tax-Free Amount
Before 2011, sophisticated estate tax planning to utilize successfully the tax-free amounts of both spouses usually involved the creation of a certain kind of trust for the surviving spouse. Since January 1, 2011, the estate tax law has included a concept referred to in the planning community as "portability."
Portability is simply the process by which a surviving spouse can add the unused portion of his or her deceased spouse's tax-free amount to his or her own tax-free amount to offset or completely eliminate estate taxes which would otherwise be due and payable upon the surviving spouse' death.
Unfortunately, the surviving spouse does not automatically receive his or her deceased spouse's unused estate-tax-free amount. In order to accomplish transfer of the deceased spouse's unused tax-free amount over to the surviving spouse, a "portability election" must be made on a timely filed federal estate tax return for the deceased spouse. This return requirement exists even though the deceased spouse's estate would not otherwise be required to file a return because his or her assets were valued at less than the filing threshold.
Strict Deadline for Making the Portability Election
The law says a portability election must be made on a timely filed federal estate tax return. To be considered timely, the federal estate tax return must be filed within 9 months after the deceased spouse's date of death (or within the amount of time provided in any extensions obtained from the IRS). Unfortunately, many clients were unaware of this deadline to claim the benefits of portability for the surviving spouse. Until recently, if the deadline to make a portability election was inadvertently missed, the surviving spouse was simply out of luck. Without more sophisticated trust planning or a timely portability election, the deceased spouse's unused tax free amount could not be used to offset estate taxes due after the death of the surviving spouse and was therefore wasted. The law did not provide for a late portability election.
Relief to Make Late Portability Election – Rev. Proc. 2014-18
The IRS has decided to provide some limited relief for those wishing to take advantage of the portability election at a deceased spouse's death who may have been unaware of the strict deadline. IRS Rev. Proc. 2014-18 spells out the grounds for relief. Specifically, to claim the relief individuals must satisfy the following:
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The deceased spouse must have died after December 31, 2010 (portability was not available prior to this time) and before 2014;
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The value of the deceased spouse's estate must have been less than the estate-tax-free amount for the year of death (i.e., $5,000,000 in 2011, $5,120,000 in 2012, and $5,250,000 in 2013); and
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A Form 706 – Federal Estate Tax return must be filed for the deceased spouse's estate on or before December 31, 2014.
Any person who has lost a spouse after 2011 (but before 2014) and missed the filing deadline to make a portability election with respect to such deceased spouse's estate is encouraged to seek legal advice as soon as possible concerning whether a late portability election makes sense given his or her circumstances. As indicated above, this limited relief is scheduled to expire at the end of 2014.
