Most people have heard of the estate and gift tax exemption for purposes of federal estate or gift taxes in the United States. Currently, an individual has an exemption of up to $11.18M. This means that the first $11.18M of assets a person owns at their passing is exempt from federal estate taxes or alternatively, the first $11.18M of property given away during life is exempt from the federal gift tax (if an election to use the exemption is specifically made for these gifts). Many people are also aware that in the case of a married couple it is possible for a surviving spouse to “inherit” the exemption of the first spouse to pass (this is known as “portability”). What most people are unaware of, is that portability is not automatic, portability is an election that must be made in a timely fashion.
The portability election is supposed to be made by filing a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. This return is supposed to be filed within 9 months of the decedent’s death. However, this is an often-overlooked step when an individual is known to have an estate well within the exemption amount and thus does not owe estate tax. It is only much later (long after the 9 months has passed) that the surviving spouse discovers (or perhaps the heirs of the surviving spouse discover) the estate tax return was never filed and portability was never elected.
It is possible to request the IRS for a letter ruling under Regs. Sec. 301.9100-3. However, this is an expensive and time-consuming process. For a time, the IRS had provided a simplified procedure for obtaining an extension of time for filing the portability election if the estate was not required to file an estate tax return and the decedent was survived by a spouse. This simplified method was only available on or before Dec. 31, 2014. After this date, letter ruling requests were the only avenue for relief, and the IRS began issuing a large number of rulings granting the requested extensions for estates that were not required to file an estate tax return.
To provide relief for taxpayers and reduce the burden on the IRS of reviewing and issuing these letter rulings the IRS issued Rev. Proc. 2017-34. This Rev. Proc. provides a simplified method to obtain an extension of time to elect portability that is available to estates of decedents who do not have a filing requirement under Sec. 6018(a). The Rev. Proc. provided two avenues of relief. First, any surviving spouse could elect portability for a decedent with no estate tax filing requirement through January 2, 2018. Second, the 9-month timeline for filing an estate tax return and electing portability was increased to two years.
To qualify for the simplified election, the executor must file a complete and properly prepared Form 706, on or before the later of Jan. 2, 2018, or the second anniversary of the decedent’s date of death. The executor must state at the top that the return is “filed pursuant to Rev. Proc. 2017-34 to elect portability under § 2010(c)(5)(A).”