August 14, 2017

Good News for Surviving Spouses Seeking to Elect Portability

by Chelsea May

IRS Revenue Procedure 2017-34, effective as of June 9, 2017, increases the amount of time that a surviving spouse has to file an estate tax return (Form 706) for the purpose of electing portability of the Deceased Spousal Unused Exclusion amount (otherwise known as “DSUE”).  The portability election, which  was first introduced in 2010 and made permanent under the American Taxpayer Relief Act of 2012, offers a great way for a surviving spouse to preserve the unused estate tax exemption of their deceased spouse.  The DSUE amount can then be added to the surviving spouse’s own exemption amount and be used to shelter the surviving spouse’s lifetime gifts and transfers at death from estate taxes.

Prior to June 9, 2017, a portability election was required to be made on a timely filed estate tax return, due to the IRS nine months from the decedent’s date of death, with the availability of an automatic six month extension.  The IRS has once before provided some relief from this deadline in Revenue Procedure 2014-18, but that ruling was temporary and provided no relief for the estates of decedents dying after January 1, 2014.  The IRS claims to have been flooded with numerous requests for an extension of time to file for the portability election and has issued this new Revenue Procedure to provide a simplified method to obtain the extension to elect portability for a decedent’s estate who has no estate tax filing requirement to the later of (i) January 2, 2018 or (ii) the second anniversary of the decedent’s date of death.  Note that the regulation provides that this longer deadline is not available to the estate of a decedent if an estate tax return was timely filed.  In such case, the executor either will have elected portability by timely filing the return or will have affirmatively opted out of portability by not making the election.     

Although preparing and filing a estate tax return can be timely and costly to the surviving spouse, filing the return to elect portability could save their future heirs thousands, if not millions in estate taxes.  Therefore, it is important to discuss the advantages and disadvantages of making this election with any surviving spouse, especially those who are young and could potentially experience a great deal of wealth accumulation during their surviving lifetime.   It’s also important to remember that, generally speaking, if no exceptions apply, a surviving spouse can only use the DSUE amount of his or her last deceased spouse.  Therefore, if a widow marries again, and her second husband also predeceases her but utilizes all of his exemption amount on gifts to his children, not only is our widow heartbroken and once again mourning the loss of a great love, she also must mourn the loss of her first husband’s DSUE amount.  Finally, when planning with a DSUE, it’s important to keep in mind that the DSUE amount only applies to a deceased spouse’s unused estate and gift tax exclusion amount and not a deceased spouse’s generation skipping transfer (“GST”) tax exclusion amount.