About this time last year I tried to help a reader whose question had no clear answer. Yesterday the Internal Revenue Service in effect addressed that question with a ruling that will make things considerably easier for my reader and many others like him. The agency’s action will also have implications for same-sex married couples, who only during the past year have become entitled to the same federal tax benefits as heterosexual spouses.
The ruling, in Revenue Procedure 2014-18, extends the time to take advantage of a key estate tax break for married couples that Congress introduced on an interim basis starting in 2011 and made permanent with the American Taxpayer Relief Tax Act of 2012. Tax geeks dubbed it “portability.”
In a nutshell, portability makes it possible for widows and widowers to carry over the estate tax exemption of the spouse who died most recently and add it to their own. At current rates this enables married couples to transfer $5.34 million apiece ($10.68 million together) tax-free. (See “Estate Planning For The 99%.”)
To take advantage of this option or “elect portability” (in legal lingo), the executor handling the estate of the spouse who died must file an estate tax return (IRS Form 706), even if no tax is due. This return is due nine months after death with a six-month extension allowed. (For questions and answers about other aspects of portability, see “A Married Couple’s Guide To Estate Planning.”)
Many folks who should have filed a return electing portability failed to do so — either because they (or their financial advisors) didn’t know about the tax break, or because it seemed so unlikely that the widow or widower will ever be worth more than the tax-free amount, the surviving spouse’s portion of which keeps getting adjusted for inflation. That’s what happened in the family of Alan Hurley, 56, an engineer in Denver, who sent me this question last year:
“My Dad passed away on Feb. 1, 2011 and no estate tax return was filed since his estate was well under $5 million. Recently we were reviewing my Mom’s estate planning and were made aware of the portability issue. My Mom’s estate is very likely to significantly exceed $5 million. We contacted the attorney that did my Dad’s estate and he said he was not aware of the portability option. Is there any way to recover my Dad’s unused exemption? This appears to be an honest mistake during the closing out of my Dad’s estate. Is there any way to work with the IRS to show what happened and get some relief?”
I replied soon after in the post, “The Deadline Every Married Person (And Financial Advisor) Needs To Know About.” The headline is still current, but for a limited time the answer to questions like this one has changed. Presumably the IRS was so bombarded with pleas for mercy from folks like my reader that they decided to cut them a break. At least for now, people who haven’t had good tax advice on this subject won’t be disadvantaged.
The extension of time applies only to situations in which, based on the value of the estate and taking into account any taxable gifts, the taxpayer was not required to file an estate tax return for other reasons.
In other words, you can get the extension of time only if the sole reason for filing Form 706 is to carry over what the law refers to as the “deceased spousal unused exclusion amount.” (This has become known by the short-hand, “the DSUE amount.”)
The Revenue Procedure now allows an executor to elect portability for a person who:
- Died after Dec. 31, 2010, and on or before Dec. 31, 2013;
- Was a citizen or resident of the United States on the date of death; and
- Had a surviving spouse.
If you meet these requirements, you can now get an extension of time to file Form 706 without going to the costly and time-consuming procedure of getting a Private Letter Ruling from the IRS. But to do that you must file Form 706 by Dec. 31, 2014.
Yesterday’s Revenue Procedure indicates that you should write at the top of the form that the return is “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).” (Those capital letters are theirs, not mine.)
The Revenue Procedure also includes instructions about claiming a credit or refund of any tax overpaid. The statute of limitations for doing that is three years from the date of filing Form 706, or within two years from the date of payment of the tax, whichever period expires later. This provision has particular relevance to the surviving spouse of a same-sex married couple. Only as a result of the Supreme Court’s historic decision in United States v. Windsor and a subsequent IRS pronouncement, Revenue Ruling 2013-17, did portability become available to them. (See “Same-Sex Married Couples Will Get Federal Tax Breaks, No Matter Where They Live.”) So it’s entirely conceivable that once they take advantage of portability, they will be entitled to a refund of tax they paid.
What if you already applied for a Private Letter Ruling and would prefer to simply file Form 706? Under the Revenue Procedure, you have until March 10, 2014 to withdraw it and get a refund of the application fee.
Words to the wise going forward, though. For deaths after Dec. 31, 2013, the IRS isn’t going to be so lenient. At that point, if you miss the deadline, you’ll need to file a Private Letter Ruling, make your excuses, and hope for the best.
Deborah L. Jacobs, a lawyer and journalist, is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide, now available in the third edition.
Source: Forbes Business