The IRS has issued guidance giving certain estates of married individuals who died during the first six months of 2011 an extension of the deadline to make the portability election to pass the decedent’s unused estate and gift tax exclusion amount to the surviving spouse. Estates qualifying for and taking advantage of the extension will have up to fifteen months after the date of death to make the election.
Background on the portability election. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 added a new portability feature for estates of decedents dying after 2010 and before 2013 under which the applicable exclusion amount is the sum of: 1) the basic exclusion amount (i.e., $5 million with an adjustment for inflation after 2011); and, 2) in the case of a surviving spouse, the deceased spousal unused exclusion (DSUE) amount.
The DSUE is the lesser of: 1) the basic exclusion amount; or, 2) the excess of the basic exclusion amount of the last deceased spouse dying after December 31, 2010 of the surviving spouse, over the amount on which the tentative tax on the estate of the deceased spouse is determined.
A surviving spouse may use the DSUE amount in addition to his or her own $5 million exclusion (as adjusted for inflation after 2011) for taxable transfers made during life or at death.
If a surviving spouse is predeceased by more than one spouse, the amount of unused exclusion that is available for use by the surviving spouse is limited to the lesser of $5 million (as adjusted for inflation after 2011) or the unused exclusion of the last deceased spouse. This so-called last deceased spouse limitation applies whether or not the last deceased spouse has any unused exclusion, and whether or not his or her estate makes a timely election to allow the surviving spouse to use the DSUE amount.
A DSUE 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 the amount is computed, and makes an election on the return that the amount may be taken into account by the surviving spouse. Even if an estate isn’t required to file a Form 706 (e.g., because the value of the gross estate is less than the exclusion amount), a Form 706 must be filed in ordered to make the election.
The election, once made, is irrevocable. No election may be made if the estate tax return of the deceased spouse is filed after the due date (including extensions) for filing the return.
In the fall of 2011, the IRS issued Notice 2011-82, 2011-42 IRB and IR 2011-97 to remind executors of the estates of married decedents dying after 2010 that they must file an estate tax return in order to pass along the unused estate and gift tax exclusion amount to their surviving spouse. Notice 2011-82 also indicated that the IRS intends to issue regulations on the election and sought comments on what the regulations should address and other issues pertaining to the election.
Background on filing deadlines. Under IRC Section 6075(a), the executor of a decedent’s estate must file the Form 706 within nine months after the decedent’s death. The IRS may grant a reasonable extension to file any return, not to exceed six months.
Under Reg. §20.6081-1(b), an estate is granted an automatic six-month extension to file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, if a Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, is filed on or before the due date for filing the Form 706.
The IRS may grant a discretionary extension of time to file Form 706 to an estate that did not request an automatic extension of time to file before the due date for Form 4768. Such an extension cannot be for more than six months beyond the regular due date for filing the Form 706, unless the executor is abroad.
To obtain a discretionary extension, Form 4768 must be filed with a detailed explanation of why it is impossible or impractical to file a reasonably complete Form 706 by the due date. In addition, it must include an explanation showing good cause for not requesting the automatic extension. Reg. § 20.6081-1(c).
Extended deadline to make portability election. Notice 2012-21 grants to qualifying estates (see below), for the purpose of making a portability election, a six-month extension of time for filing Form 706. The extension applies when the executor of a qualifying estate did not file a Form 4768 within nine months after the decedent’s date of death and, therefore, the estate did not receive the benefit of the automatic six-month extension. An executor of a qualifying estate that wants to obtain the extension must file Form 4768 no later than 15 months after the decedent’s date of death. With the extension granted by Notice 2012-21, the Form 706 of a qualifying estate will be due 15 months after the decedent’s date of death.
Estates qualifying for extended deadline to make portability election. The extension is available to qualifying estates of decedents who are U.S. citizens or residents. A qualifying estate is an estate in which:
- The decedent is survived by a spouse;
- The decedent’s date of death is after December 31, 2010 and before July 1, 2011; and
- The fair market value of the decedent’s gross estate does not exceed $5,000,000.
An estate is not a qualifying estate if it effectively requested an automatic six-month extension of time to file Form 706 under Reg. §20.6081-1(b) by timely filing Form 4768 on or before the due date for filing Form 706.
If it is later determined that an estate does not meet the requirements of a qualifying estate, no extension will be treated as granted under Notice 2012-21, and the Form 706, therefore, won’t be timely.
Reason behind the extension. In responding to Notice 2011-82, many commentators raised the issue of an extension of time to file Form 706 to make the portability election. They noted that the executors of estates of decedents dying in 2011, particularly during early 2011, did not have the benefit of guidance on the election. In addition, the commentators stressed that executors of estates having assets with a value not in excess of $5,000,000 might not have known about the requirement to file Form 706 to make the portability election at all. The IRS agreed that it is appropriate to offer to executors of qualifying estates a six-month extension of time to file Form 706 until 15 months after the decedent’s date of death, provided that the executor files an application for a six-month extension on Form 4768 under the authority of Notice 2012-21 before the date that is 15 months from decedent’s date of death.
How to get the extension. The IRS will grant the executor of a qualifying estate a six-month extension of time until 15 months after the decedent’s date of death to file Form 706 if the executor:
- Files Form 4768 with the IRS office designated in the form’s instructions;
- Files Form 4768 no later than 15 months from the decedent’s date of death; and
- Enters at the top of Form 4768 the notation, “Notice 2012-21, Extension for Good Cause Shown,” or otherwise sufficiently notifies the IRS on or with Form 4768 that it is being filed pursuant to Notice 2012-21.
An executor following these requirements will be deemed to have shown good and sufficient cause and to have provided all explanations required under Reg. §20.6081-1(c) without the need to include any further explanations on Form 4768.
If, before the issuance of Notice 2012-21, an executor of a qualifying estate filed a Form 706 after the due date for filing Form 706 had passed but before 15 months from the decedent’s date of death without having timely requested an automatic six-month extension of time to file Form 706, the executor may file Form 4768 in accordance with the requirements of Notice 2012-21 Section 5 and the extension will relate back to the due date of Form 706.