In 2010 Congress enacted legislation which provides for the portability of a decedent’s spouse unused exclusion amount (“DSUEA). For example, if Bob dies with 12 million in unused exclusion amount (equivalent to 4.8 million in estate tax savings), his surviving spouse can “port” and add such amount to her own exclusion amount at her death. Portability of the DSUEA is elective and has been discussed in a prior blog.
To elect to use the DSUEA, a surviving spouse or the “executor”, if different than the surviving spouse, MUST file an estate tax return for the deceased spouse and make an affirmative election. Such an election must be made by the time an estate tax return is due, normally 9 months after a decedent’s death or more if an extension if filed.
Executors who have missed this deadline were granted discretionary relief by the Internal Revenue Service (“IRS”) via a private letter ruling which was expensive and time consuming. To grant relief, the IRS must be satisfied that the taxpayer acted reasonably and in good faith, and that granting relief would not prejudice the interest of the government.
To avoid the expense, the time and the number of requests, in 2017, the IRS provided that an executor of a decedent’s estate, which amount does NOT exceed the threshold for otherwise filing an estate tax return, could file a late election to elect portability at any time up to 2 years after a decedent’s death. Apparently, such an extension of time was not enough for taxpayers and the IRS has now issued a ruling that allows that time to be 5 years after a decedent’s death:
The following requirements are necessary to qualify for such 5-year extension:
1. The Form 706 must be completed and properly filed on or before the 5th anniversary of the decedent’s death.
2. Decedent has to be survived by a spouse.
3. Decedent dies after 2010.
4. Decedent was a citizen or resident of the US on the date of death.
5. The executor is not otherwise required to file an estate tax return because the estate is under the threshold amount.
6. The executor did not file a timely estate tax return within the permitted time.
7. The executor states at the top of the form “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER SECTION 2010(c)(5)(A)”
ADVICE: Portability should always be on your checklist and in your advice to clients. If a surviving spouse declines to elect portability, then the surviving spouse should sign a document confirming the declination. You do not want the surviving spouse’s beneficiaries looking to you for the increased estate taxes because portability was not previously elected. While the time period for the election of portability is the due date (plus extensions) of the tax return, there is now a 5 year “grace” period. Be sure your client who has declined to elect portability understands that, if they later decide to elect portability, they MUST contact you within such 5-year period.
WORD OF THE WEEK: Extension for filing an estate tax return. The estate tax return is due 9 months from the date of the decedent’s death. An automatic six-month extension of time to file is granted if an IRS Form 4768, theApplication for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes is filed, and any estimated estate taxes are paid. Treasury regulations section 20.6081-1(c) provides that an executor who fails to timely apply for an the 6-month extension of time may still apply for an extension of time to file upon a showing of good and sufficient cause.
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