The Internal Revenue Service has made it easier for surviving spouses to claim a late portability election.
Portability gives surviving spouses the right to “port over” the deceased spouse’s unused federal estate tax exemption (DSUE) to themselves – even if the decedent’s estate is not taxable. This permits the survivor to use his/her own exemption, and the unused portion of the deceased spouse’s exemption, thus potentially passing on more tax-free money to heirs. To claim portability, a 706 (estate tax return) must be filed and the portability option elected. The current federal estate tax exemption is $5.49 million.
Often, a 706 was not filed timely because the surviving spouse, personal representative, and in some cases even accountants and financial advisors, did not know about the availability of portability, or failed to realize that obtaining portability could be valuable at the time of the survivor’s death. (More on that point later). Once this oversight was recognized, claiming portability required the estate to request a private letter ruling from the IRS – a very costly procedure. In recent years the IRS has received a massive volume of private letter ruling requests from estates that have missed the filing deadline.
Now, the IRS has issued Revenue Procedure 2017-24, which relaxes the timeline for filing for portability. For non-taxable estate of spouses who have died between January 1, 2011 and January 2, 2016, the portability election can be made up until January 2, 2018. For non-taxable estates of spouses who die after January 2, 2016, the election may be taken up to two years following the date of death. A private letter ruling is not necessary, and there is no penalty. (Note that for taxable estates, the original 706 filing deadline remains.)
With the current lifetime exemption at $5.49 million, it is easy to understand the reasons a surviving spouse might not think it necessary to preserve the second exemption. But there are good reasons to opt for portability:
- Many survivors and their advisors do not realize that the survivor will likely receive the bulk of the decedent’s assets, increasing the likelihood of the survivor’s estate being taxable. Portability allows the survivor to shelter twice the amount: $10.98 million vs. $5.49 million.
- There is always the chance that the survivor’s assets will increase substantially, particularly if the survivor is younger and therefore has more time to acquire or inherit assets.
- Lastly, one can never be certain about where the federal estate tax is headed. While the current administration and Congress have made it clear they favor a complete repeal of the estate tax, it’s an issue that’s been a longstanding political football. Depending on what occurs in 2018 and 2020, both politically and economically, it would not be shocking if the estate tax is retained or even made less generous. Opting for portability is a prudent insurance policy for the surviving spouse.
Read more about federal estate taxes.