On January 27, 2014, the Internal Revenue Service published Revenue Procedure 2014-18, providing a simplified method to obtain an extension of time to make the “portability” election for estate and gift tax purposes with respect to the estate of a decedent who died in 2011, 2012, or 2013 survived by a spouse.
Portability of the unified credit was first enacted for two years by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, effective January 1, 2011, and then was made permanent by the American Taxpayer Relief Act of 2012. When a decedent dying on or after January 1, 2011, is survived by a spouse, the amount of the unified credit available to that decedent’s estate for estate tax purposes that is not used by that decedent’s estate is “portable” – that is, it can be used for gift or estate tax purposes by the surviving spouse. Although the unified credit is the actual mechanism provided by the Internal Revenue Code and operates to directly reduce the amount of estate tax (or gift tax), the available unified credit is initially calculated each year as the amount of gross tax that would be owed if the taxable estate were equal to the “basic exclusion amount,” which itself is indexed for inflation each year after 2011. The “basic exclusion amount” is thus similar to an exemption, and it is often referred to as an “exemption.” Any unified credit that the decedent used to reduce or eliminate gift tax paid on taxable gifts during life reduces the amount available for estate tax purposes, which is what gives the credit its “unified” character.
(1) If a decedent who has never made taxable gifts dies in 2014 when the basic exclusion amount is $5,340,000 and leaves nothing to anyone except that decedent’s surviving spouse, then the marital deduction eliminates the taxable estate, no unified credit is used, and the entire unified credit is “portable” to the surviving spouse. The effect is to increase the surviving spouse’s total exclusion amount, called the “applicable exclusion amount,” by that $5,340,000.
(2) If the decedent had made taxable gifts of $1,500,000 and at death left $600,000 to children, then the applicable exclusion amount available to that decedent’s estate would be $3,840,000 ($5,340,000-$1,500,000) and the unused amount portable to the surviving spouse would be $3,240,000 ($3,840,000-$600,000).
The statute (section 2010(c) of the Internal Revenue Code) refers to the $5,340,000 in (1) and the $3,240,000 in (2) as the “deceased spousal unused exclusion amount.” Regulations published in June 2012 abbreviate it to the “DSUE amount.”
Due Date of the Portability Election
The statute allows the DSUE amount to be made available to the surviving spouse only if the predeceased spouse’s executor elects portability on a federal estate tax return. Specifically, section 2010(c)(5)(A) states:
A deceased spousal unused exclusion amount may not be taken into account by a surviving spouse … unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account. Such election, once made, shall be irrevocable. No election may be made under this subparagraph if such return is filed after the time prescribed by law (including extensions) for filing such return.
The normal time prescribed for filing a federal estate tax return is nine months after the date of the decedent’s death, although the executor may claim an automatic extension of six months, making the extended due date 15 months after the date of the decedent’s death.
Under section 6018 of the Internal Revenue Code, an estate tax return is not required unless the decedent’s gross estate exceeds the basic exclusion amount (reduced by the amount of taxable gifts since September 9, 1976). But even if no estate tax return is required for estate tax purposes, an estate tax return may still be filed solely to elect portability, and under section 2010(c)(5)(A) (quoted above) that is the only way portability can be elected. Thus, for an estate that is smaller than the filing requirement, it might be said that the return is not “prescribed” (required) to comply with the estate tax law, but it is “prescribed” if a portability election is desired. Before the regulations were published in June 2012, some reasoned that if a return is not required for estate tax purposes then no time is “prescribed” for its filing, and a return may be filed solely to make the portability election at any time, perhaps even after the surviving spouse has died and it is determined that a portability election would have been useful. The June 2012 regulations (Reg. §20.2010-2T(a)(1)) rejected that argument and stated that the due date for filing an estate tax return solely to elect portability is the same as the due date of a return required for estate tax purposes.
Extensions of the Portability Election Due Date: Revenue Procedure 2014-18
Treasury Regulation §301.9100-3 grants the Internal Revenue Service broad discretion to grant extensions of due dates prescribed by regulations (often referred to as “9100 relief”), but not due dates prescribed by statute. The Service has interpreted this 9100 relief as available for portability elections because the due date is prescribed by the June 2012 regulations.
Revenue Procedure 2014-18, noting that this relief has been granted in several letter rulings, provides a simplified method to obtain an extension of time to make a portability election in the case of decedents’ executors who are not required to file an estate tax return for estate tax purposes and who in fact did not file an estate tax return, but only in the case of predeceased spouses who died in 2011, 2012, or 2013. The simplified method to obtain that extension is to simply file the otherwise late estate tax return, on or before December 31, 2014, and state at the top of the return “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).” The return must then be prepared in accordance with Reg. §20.2010-2T(a)(7). See “Number Two: The Portability Regulations” in our “Top Ten” Estate Planning and Estate Tax Developments of 2012. Under section 2203 of the Internal Revenue Code and Reg. §20.2010-2T(a)(6)(ii), if no executor or administrator of the predeceased spouse’s estate is appointed – for example, by a probate court – an “executor” for purposes of electing portability can be “any person in actual or constructive possession of any property of the decedent.”
Executors of decedents who died in 2011, 2012, and 2013 survived by a spouse may now elect portability if no estate tax return was needed or was filed, but only by acting under Rev. Proc. 2014-18 before the end of 2014. This will save those executors the expense and uncertainty of a ruling request for 9100 relief. Such executors who have already filed ruling requests for 9100 relief may receive a refund of their user fee if they notify the Service before March 10, 2014 (or, if earlier, before the ruling is issued) that they will rely on Rev. Proc. 2014-18 and withdraw their ruling request.
If the surviving spouse has died and an estate tax return was filed without the benefit of portability, the surviving spouse’s executor may file a protective claim for any refund that portability would justify, but such claims might be due as early as October 1, 2014, and Rev. Proc. 2014-18 provides no relief from that due date. Portability provides for the use of a DSUE amount, however, only if both spouses died on or after January 1, 2011.
Same-Sex Married Couples
Executors who can benefit from Rev. Proc. 2014-18 include executors of decedents with same-sex spouses to whom they were legally married. Those executors could not have known that portability would be available for same-sex married couples until the Supreme Court decided United States v. Windsor, 570 U.S. ___, 133 S. Ct. 2675 (2013), on June 26, 2013, and the Service issued Rev. Rul. 2013-17, 2013-38 I.R.B. 201, on August 29, 2013. Revenue Procedure 2014-18 provides relief for those executors who were not required to file an estate tax return, while Rev. Rul. 2013-17 itself provides relief if an estate tax return was filed without electing or using portability. See Windsor Revisited: IRS Guidance Recognizing Same-Sex Marriages and “Number Two: The Treatment of Same-Sex Married Couples” in our “Top Ten” Estate Planning and Estate Tax Developments of 2013.
The relief provided by Rev. Rul. 2014-18, however, applies to all married persons who died in 2011, 2012, and 2013 for whom an estate tax return was not required, not just to same-sex married couples.
Revenue Procedure 2014-18 provides no relief with respect to decedents who die in 2014 or later. The executors of such decedents have until at least October 1, 2014, to file estate tax returns (or claim automatic extensions) and make the portability election. If they fail to do so, Rev. Proc. 2014-18 confirms that they may continue to seek 9100 relief through a ruling request under Reg. §301.9100-3.
More Guidance Expected
The Treasury-IRS Priority Guidance Plan for the 12-month period beginning July 1, 2013, includes a new guidance project described as “Revenue Procedure under §2010(c) regarding the validity of a QTIP election on an estate tax return filed only to elect portability.” That is not Rev. Proc. 2014-18. It is expected that this new guidance project will update the applicability of Rev. Proc. 2001-38, 2001-24 I.R.B. 1335, which announced circumstances in which the IRS “will disregard [a QTIP] election and treat it as null and void” if “the election was not necessary to reduce the estate tax liability to zero, based on values as finally determined for federal estate tax purposes.” The QTIP election will always be unnecessary to reduce estate tax liability on an estate tax return not even required for estate tax purposes but filed solely to elect portability, but QTIP elections on such returns are explicitly contemplated by the June 2012 regulations (Reg. §20.2010-2T(a)(7)(ii)(A)(4)). The tension between those two pronouncements is what this new item on the Priority Guidance Plan will evidently address.
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