File Portability Election Late? Is There Relief?

The concept of portability has been discussed in a prior blog. What happens if a surviving spouse does not file the portability election timely? The spouse is potentially losing a savings of over $2 million in estate taxes! Relief for filing a late portability election depends on whether a federal estate tax return otherwise needs to be filed or if the taxpayer is only filing to elect portability.

NO REQUIREMENT TO FILE FORM 706 OTHER THAN TO ELECT PORTABILITY (TOTAL TAXABLE  ESTATE IS UNDER THE BASIC EXCLUSION AMOUNT OF $5.490 MILLION)

The portability election must be filed on a Form 706 by the the date a normal federal estate tax return must be filed (9 months after the date of death or 15 months with an automatic 6 month extension.) However, taxpayers who do not have taxable estates (currently under $5.490 million) may forget to file such a return to elect portability. What happens if the return is not filed within the time period? Is the surviving spouse out of luck?

Not necessarily. If a time deadline is created under federal tax regulations, and a deadline is missed, then the Internal Revenue Service (the “Service”) may extend the deadline, at their discretion, if the taxpayer can show the taxpayer acted reasonably and in good faith and the late election will not prejudice the government. If, however, the deadline is fixed by a statute, then ONLY a 6 month extension is allowed.

The current statute provides that a Form 706 must be filed for estates with a value more than the basic applicable exclusion amount (currently $5.490 million). As many estates electing portability are NOT otherwise required to file Form 706 (the estate is under $5.490 million), this statute is not applicable. As this statute does not apply and the time period for electing portability is provided by regulation, the Service can use their discretion for late portability elections for taxpayers who are not otherwise required to file a Form 706.

REQUIRED TO FILE FROM 706 – TOTAL TAXABLE ESTATE EXCEEDS BASIC APPLICABLE EXCLUSION AMOUNT OF $5.490 MILLION

On a recent listserv from Leimberg by Beth Kaufman, she points out alternatives if a taxpayer IS required to file a Form 706 within 9 months (and does NOT ask for an automatic 6 month extension prior to the 9 month deadline) but neglects to file the return by the 9 month deadline. Can the taxpayer receive an extension to file the return and elect portability? Yes. A Form 4768 can be filed even after the 9 month deadline, but within the 15 month period after the date of death, if the request is for  “good cause”.

What happens when a taxpayer properly files a return within the 9 month deadline and makes a mistake?  Currently the default position on the Form 706 is that, if you do nothing, the taxpayer elects portability. A taxpayer does not need to check anything. What happens if a taxpayer inadvertently elects OUT of portability by checking the box. Can that be fixed?

The portability regulations provide for an automatic 6 month extension if the return is timely filed. Thus, assuming that the portability election was properly made further relief may not be necessary. In the example in the previous paragraph, the portability election was NOT properly made. The regulation also states that relief may be permitted if “the return that was timely filed was not complete or properly prepared and that insufficiency is corrected within six months from the unextended due date of the return”.

Thus, if the return is filed within 9 months and the return was not correct (an incorrect election out of portability), the  taxpayer can get relief if the return is corrected within 6 months after the 9 month due date. The regulation does not require any other error to request relief for a timely filed return to receive the automatic 6 month extension.

ADVICE:  ANY time concern arises over the time frame to elect portability, do not assume it is too late. Review these regulations and statutes to confirm the time frame. The best advice is to be proactive. Remember to add portability on your checklist and make sure that, ANY time a spouse survives, you clearly document whether or not the surviving spouse wants to elect portability. Add deadlines to your calendar.

WORD OF THE WEEK:  Statute versus regulations… A statute is the specific, codified statement of a law that has been approved by the legislative body of a government. The regulations are the Service’s explanation and interpretation of the law.

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