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Dec. 31, 2014 is deadline for portability for small estates of pre-2014 decedents

Rev Proc 2014-18, 2014-7 IRB 513

Pursuant to Rev Proc 2014-18, 2014-7 IRB 513 issued earlier this year, estates of decedents who died before Jan. 1, 2014, that fall below the dollar threshold for having to file an estate tax return, and that want to elect to take the estate tax portability exclusion, can get an automatic extension of time to make that election. In order to take advantage of Rev Proc 2014-18, the estate must file the estate tax return by Dec. 31, 2014.

This article discusses Rev Proc 2014-18’s rules as well as rules under which estates that miss the Dec. 31 deadline, or that otherwise don’t qualify for Rev Proc 2014-18’s relief, can get an extension to elect portability.

Background. Code Sec. 2010(c) allows the estate of a decedent who is survived by a spouse to make a portability election, which allows the surviving spouse to apply the decedent’s unused exclusion amount to the surviving spouse’s own transfers during life and at death.The amount received by the surviving spouse is called the deceased spousal unused exclusion, or DSUE, amount.

Code Sec. 2010(c)(5)(A) provides certain requirements that the executor of the estate of a deceased spouse must satisfy to allow the decedent’s surviving spouse to apply the decedent’s DSUE amount to the surviving spouse’s transfers.In particular, the executor of the estate of the deceased spouse must elect portability of the DSUE amount on a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which must include a computation of the DSUE amount.Under Code Sec. 2010(c)(5)(A), a portability election is effective only if made on a Form 706 that is filed within the time prescribed by law (including extensions) for filing such return.

Reg. § 20.2010-2T(a)(1) provides that an estate that elects portability will be considered to be required to file a return under Code Sec. 6018(a).Accordingly, the due date of an estate tax return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained).

Section Reg. § 301.9100-3 provides for an extension of time for making regulatory elections, i.e., elections that are provided in regs and not in statutes.When an executor is not required to file an estate tax return under Code Sec. 6018, the Code does not specify a due date for an estate tax return filed for the purpose of making a portability election.Rather, as described above, Reg. § 20.2010-2T(a)(1) provides the due date rule in that case.Accordingly, with respect to estates not required to file an estate tax return under Code Sec. 6018, the portability election is a regulatory election, and is thus subject to the rules of Reg. § 301.9100-3. (PLR 201406004)

Rev Proc 2014-18. In January, 2014, IRS issued Rev Proc 2014-18.(See Weekly Alert ¶  40  01/30/2014.)Under its provisions, a taxpayer who meets the requirements listed below will be deemed to meet the requirements for relief under Reg. § 301.9100-3 .Accordingly, for purposes of electing portability, the taxpayer’s Form 706 will be considered to have been timely filed in accordance with Reg. § 20.2010-2T(a)(1). (Rev Proc 2014-18 Sec. 3.02)

In order to qualify for the automatic extension, the following requirements must be met:

1. The taxpayer is the executor of the estate of a decedent who: (a) has a surviving spouse; (b) died after Dec. 31, 2010, and on or before Dec. 31, 2013; and (c) was a citizen or resident of the United States on the date of death;
2. The taxpayer is not required to file an estate tax return under Code Sec. 6018(a) (as determined based on the value of the gross estate and adjusted taxable gifts, without regard to Reg. § 20.2010-2T(a)(1));
3. The taxpayer did not file an estate tax return within the time prescribed by Reg. § 20.2010-2T(a)(1) for filing an estate tax return required to elect portability;
4. A person permitted to make the election on behalf of a decedent, pursuant to Reg. § 20.2010-2T(a)(6), must file a complete and properly-prepared Form 706 on or before Dec. 31, 2014; and
5. The person filing the Form 706 on behalf of the decedent’s estate must state at the top of the Form 706 that the return is “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER Code Sec. 2010(c)(5)(A).” (Sec. 3.01; Sec. 4.01)

Thus, per (4) above, in order to qualify under Rev Proc 2014-18, one must file a complete and properly-prepared Form 706 by Dec. 31, 2014.

Application of Rev Proc 2014-18 to same-sex spouses. Rev Rul 2013-17, 2013-38 IRB 201, which sets out the definitions of same-sex spouses and marriage of same sex persons, for federal tax purposes, provides that its holdings will be applied prospectively as of Sept. 16, 2013.Affected taxpayers may rely on Rev Rul 2013-17 for the purpose of filing original returns, amended returns, adjusted returns, etc., provided the applicable limitations period for filing such claim under Code Sec. 6511 has not expired.See Weekly Alert ¶  3  09/05/2013.

RIA observation: Assuming that requirements (1) – (5) above are met, the estate of a decedent who, at the time of his death met the Rev Rul 2013-17 requirements for being a same-sex spouse, can qualify for the automatic extension, whether or not the decedent died before the promulgation of Rev Rul 2013-17.

Considerations for estates that qualify for Rev Proc 2014-18 relief. Just because an estate qualifies for Rev Proc 2014-18 relief doesn’t mean that it should take the steps to obtain that relief.

One significant consideration is the cost of preparing a complete and properly-prepared Form 706 return for the first spouse’s estate, which may require appraisals and/or research into tax issues, versus the potential estate tax savings at the death of the surviving spouse from the ported exemption.Such a consideration involves predicting the value of the surviving spouse’s taxable estate at her death, which, in some case will include a prediction of whether she will be remarried at death.It also involves predicting what the estate tax exemption, and other aspects of estate tax law, will be at the time of the surviving spouse’s death.

Another consideration would be whether the party(ies) that would, in effect, incur the cost of filing the estate tax return for the first spouse’s estate would benefit from the tax savings from portability.In cases involving second marriages, sometimes the cost of filing the estate tax return is in effect, incurred by the deceased’s “first family,” and not by his surviving, i.e., second, etc., spouse.

While there are numerous variables involved, there will be many circumstances under which it will be reasonable to assume that the surviving spouse’s taxable estate will be substantially less than what one assumes to be the estate tax exemption at her death; in those cases, for example, even if one qualifies under Rev Proc 2014-18, one generally wouldn’t choose to obtain the relief that Rev Proc 2014-18 provides.

Considerations for estates that don’t qualify for Rev Proc 2014-18 relief. Failing to qualify for Rev Proc 2014-18 relief, because the decedent died after 2013, the estate failed to meet the Dec. 31, 2014 deadline, or for any other reason, is not necessarily fatal to receiving an extension to make the portability election.

The instructions to 2014 Form 706 provide, “You must file Form 706 to report estate and/or GST tax within 9 months after the date of the decedent’s death.If you are unable to file Form 706 by the due date, you may receive an extension of time to file. Use Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, to apply for an automatic 6-month extension of time to file.Note: An executor can only elect to transfer the DSUE amount to the surviving spouse if the Form 706 is filed timely; that is, within 9 months of the decedent’s date of death or, if you have received an extension of time to file, before the 6-month extension period ends.”

And the instructions to Form 4768 provide, “If you have not filed an application for an automatic extension for Form 706, and the time for filing such an application has passed, an extension of time to file may still be granted if good cause is shown. File Form 4768, along with explanations of why the automatic extension was not requested and why a complete return was not filed by the due date, as soon as possible…”

RIA observation: It would seem that an estate that failed to qualify for an extension under Rev Proc 2014-18 because it failed to file its return by Dec. 31, 2014, will have a tough time establishing good cause, particularly if the decedent died during the early part of the 2011-2013 period that is provided for under Rev Proc 2014-18.On the other hand, an estate of a decedent who died in early 2014 should be able to qualify for an extension if his cause is one of several that IRS has accepted in the past for late filing for extensions, including certain mistakes by the estate’s return preparer.
RIA observation: Before attempting to obtain an extension under the above rules, estates that don’t qualify under Rev Proc 2014-18 should consider the issues at “Considerations for estates that qualify for Rev Proc 2014-18 relief,” above.

References: For the deceased spousal unused exclusion amount, see FTC 2d/FIN ¶  R-7107  ; United States Tax Reporter Estate & Gift ¶  20,104.01  ; TaxDesk ¶  781,807  ; TG ¶  41702  .