by Loraine M. DiSalvo
Prior to 2010, the federal estate tax exemption (now known more commonly as the “Basic Exclusion Amount”) was a use-it-or-lose-it benefit: if a married person died and did not take steps designed to use his Basic Exclusion Amount, either by having a trust set up for the benefit of his surviving spouse or by making bequests to persons other than his spouse, the benefits of his Basic Exclusion Amount were lost forever. Beginning on January 1, 2011, a new set of rules took effect. Under these rules, the Executor of a married person’s estate could elect to have the deceased person’s unused Basic Exclusion Amount effectively carried over to the person’s surviving spouse, so that the spouse could use the decedent’s remaining Basic Exclusion Amount on transfers during her own life or at her own death, in addition to her own Basic Exclusion Amount. This election is generally referred to as the “portability” election, because it makes the decedent’s unused Basic Exclusion Amount portable to the surviving spouse.
However, under the new statutes and the regulations that were eventually issued to accompany them, the Executor of the decedent’s estate had to file a timely and complete estate tax return in order to make the portability election. The timing requirements that apply to an estate tax return that is being filed only to make the portability election (i.e., an estate tax return being filed for an estate that otherwise would not have been required to file one because the value of the estate’s assets was less than the decedent’s remaining Basic Exclusion Amount) are the same as the timing requirements that apply to an estate tax return that is required due to the size of the estate: The return is due 9 months after the date of death. A 6 month due date extension is available, but the extension must be requested before the original 9 months is over.
Unfortunately, especially in the earlier years, many Executors failed to realize that they should be filing estate tax returns in order to take advantage of the portability election. If a timely estate tax return is not filed, then for larger estates (those with a value that exceeds the value of the decedent’s Basic Exclusion Amount plus his adjusted lifetime taxable gifts), no relief is available. For smaller estates (those that were not required to file an estate tax return except to make the portability election), relief may be available under Treasury Regulation Section 301.9100-3. However, relief under Section 301.9100-3 is available only if the Executor can establish that he acted reasonably and in good faith, even though he failed to timely file the return, and that granting the relief would not prejudice the interests of the government.
Normally, obtaining relief under Reg. Section 301.9100-3 requires filing a full private letter ruling request and paying a user fee. This is an expensive and time-consuming process. In February 2014, the IRS issued Revenue Procedure 2014-18. This Revenue Procedure created a simplified method under which an Executor of a smaller estate that qualified for relief under Section 301.9100-3 could request that relief for the failure to timely file the return. This simplified method, however, was only available until December 31, 2014. Since then, a full private letter ruling request has been required.
Apparently, since December 31, 2014, the IRS has found itself inundated by a flood of private letter ruling requests from qualified estates seeking relief from the failure to timely file estate tax returns and elect portability. In response, it has now issued Revenue Procedure 2017-34, providing a new simplified method for eligible estates to request this relief. The simplified method for requesting relief is available to the Executor of a decedent’s estate if: (1) the decedent was survived by a spouse; (2) the decedent died after December 31, 2010; and (3) the decedent was a U.S. citizen or U.S. permanent resident on the date of death. The Executor cannot have previously filed any estate tax return for the estate, and the estate cannot have been required to file a return based on the size of the estate and the adjusted value of the decedent’s taxable lifetime gifts. The Executor must also satisfy certain requirements set forth in the Revenue Procedure:
- The Executor must prepare and file a complete and properly prepared IRS Form 706 for the estate on or before the later of (1) January 2, 2018, or (2) the second anniversary of the decedent’s date of death.
- The 706 must contain the following statement at the top of the first page: “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER SECTION 2010(c)(5)(A).”
If the estate is eligible, and the Executor meets the requirements in Revenue Procedure 2017-34, the requirements of Regulations Section 301.9100-3 are deemed to be satisfied, and the estate tax return is deemed to have been timely filed.
To summarize, the Revenue Procedure makes the process of requesting a second chance much easier and less expensive for Executors of smaller estates who may have somehow failed to realize the need to make a portability election and file the estate tax return before the standard due date for an estate tax return. The simplified procedure eliminates the need for an expensive and time-consuming private letter ruling request and allows those Executors to file a timely and complete estate tax return and make the portability election. It also effectively means that the 9 month deadline for either filing the estate tax return or requesting a due date extension no longer applies to smaller estates, and gives the Executors of smaller estates up to two years to prepare and file the required estate tax return. Finally, the Revenue Procedure gives those Executors who failed to timely file an estate tax return for smaller estates a second chance at making the portability election, as long as they can have the complete and properly prepared estate tax returns filed on or before January 2, 2018.
Please note that there are still some items to be aware of: The Executor has to prepare and file the needed estate tax return either on or before January 2, 2018 (for decedents who died after December 31, 2010 but on or before January 2, 2016) or no more than 2 years from the date of death (for decedents who died after January 2, 2016). The filed return must contain the correct statement on the top of the first page. Most importantly, if it turns out upon later examination that the estate was actually required to file an estate tax return based on the value of its assets and the decedent’s adjusted lifetime taxable gifts, then the relief is not available, and any relief thought to have been made available through complying with this new Revenue Procedure is null and void. Therefore, it will still be critical that Executors be very careful to determine whether or not an estate may be required to file the estate tax return based on the value of the estate as soon as possible in the estate administration period, so that the 9 month (plus 6 month extension) deadline can be met if it applies. And, if the surviving spouse overpaid gift or estate taxes prior to the election having been made, she (or her estate) can only get a refund of the overpayment amount if the statute of limitations that would normally apply to the return on which the overpayment was made has not already expired. If the statute of limitations would expire before the IRS Form 706 for the first decedent can be filed, then the surviving spouse (or her Executor) can file a claim for the refund before the IRS Form 706 is filed for the first spouse, and that claim can then be processed after the IRS Form 706 has been processed by the IRS. Similarly, the surviving spouse cannot claim the benefit of the ported Basic Exclusion Amount on her own gift or estate tax return until after the IRS Form 706 for the deceased spouse has actually been filed.
Revenue Procedure 2017-34 not only provides a simplified method for smaller estates to qualify for relief under Regulation Section 301.9100-3, it also states that this will be the only available method for obtaining that relief. Private letter rulings requesting that relief will no longer be issued. If a private letter ruling request has already been filed with the IRS and was pending on June 9, 2017, the IRS will refund the user fee paid and close the file, and the estate will need to comply with the new Revenue Procedure process to obtain the needed relief.
For those Executors working with estates for which no estate tax return was required for reasons other than making the portability election, the availability of this new simplified method for obtaining relief from a failure to timely file will likely be great news. Of course, it will still be best to consider the issues and make the decision whether or not to make a portability election in a more timely manner.
If you are nominated as the Executor of an estate and you have questions about what you need to do, Morgan & DiSalvo is here to help. Please contact us at firstname.lastname@example.org or (678) 720-0750 to schedule a probate consultation.