It’s Not Too Late to Use Your Spouse’s Unused Estate Tax Exclusion

by Pessin Katz Law, P.A.

In Revenue Procedure 2014-18 the IRS provided an extension of time to those who wished to be sure that a decedent’s surviving spouse could benefit from the concept known as “portability”.  In the Procedure, the IRS provides the ability for an estate of a decedent who died after December 31, 2010 and before January 1, 2014 to “port” the unused portion of the deceased spousal unused exclusion amount or “DSUE” to the surviving spouse.  The extension referred to in the Revenue Procedure is “automatic”.

The Internal Revenue Code allows a decedent to pass his or her DSUE to a surviving spouse for the survivor’s use during his or her lifetime (for gifts) and at death.  The IRS has provided a procedure by which an executor of the estate of the first spouse to die may file a Federal Estate Tax Return (Form 706) and claim the DSUE even though the due date for filing such a Return (without extension) has long since passed.  The Return must include a computation of the amount of the DSUE.

The executor of the estate of the deceased spouse must elect portability of the DSUE amount on a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which must include a computation of the DSUE amount. Under Code Sec. 2010(c)(5)(A), a portability election is effective only if made on a Form 706 that is filed within the time prescribed by law (including extensions) for filing such return.

Probably in response to requests for “letter rulings” from the IRS requesting extensions of time to file a Form 706, otherwise not required except to elect portability, the IRS decided to provide for a new “automatic” extension for filing the Form so that the DSUE may be claimed by the surviving spouse or his or her estate.

The requirements below must be met in order to earn the extension.  If the requirements are met, the estate will receive an Estate Tax Closing Letter acknowledging receipt of the electing Form 706.

In order to qualify for the automatic extension:

1. The taxpayer must be the executor of the estate of a decedent who: (a) has a surviving spouse; (b) died after Dec. 31, 2010, and on or before Dec. 31, 2013; and (c) was a citizen or resident of the United States on the date of death.

2. The taxpayer is not required to file an estate tax return;

3. The taxpayer did not file an estate tax return within the time prescribed for filing an estate tax return required to elect portability; and

4. A person permitted to make the election on behalf of a decedent must file a complete and properly-prepared Form 706 on or before Dec. 31, 2014.

5. The person filing the Form 706 on behalf of the decedent’s estate must state at the top of the Form 706 that the return is “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER Code Sec. 2010(c)(5)(A).”

Taxpayers who are not eligible for relief as outlined above may request an extension of time to make the portability election by request for a letter ruling.  However, the IRS has made it clear that the above procedure is to be followed if the estate meets the requirements set forth above.  If it is later learned that the estate was required to file Form 706 because of its size, the extension becomes void and the Return will be deemed NOT to be timely filed.

As a result of this Revenue Procedure, estates of deceased surviving spouses (the second spouse to die) may be able to claim the DSUE in the estate of the first spouse to die and then file a claim for refund if any tax was paid in the estate of the second spouse to die, subject to the time limitations for claiming a refund of the estate tax paid.

The Revenue Procedure does not contain any special rules for same-sex spouses who should rely on Revenue Procedure 2013-17 for a discussion of the handling of Returns for same sex married persons.

The decision as to whether an election should be made to “port” the DSUE should not be undertaken without the guidance of an experienced estate planning attorney. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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