Portability: It’s Not Too Late

Q: My father died in 2011 and left all his assets to my mother.  She died 6 months ago with a federal taxable estate. I heard there is a provision in the federal estate tax law called “portability” which could have been used to reduce the federal taxes to zero.  We never made that election when my father died.  Is it too late?

A:  Portability allows a surviving spouse to use a deceased spouse’s unused federal estate tax exclusion (up to $5.45 million in 2016).

For those dying in 2011 and later, if a first-to-die spouse has not fully used the federal estate tax exclusion, the unused portion can be transferred the surviving spouse. Essentially, the surviving spouse can use the unused exemption of the first to die plus their own.  This is for federal purposes only as there is no portability under the current New York State Estate Tax law.

In order for the surviving spouse to be able to use the unused exemption, the executor of the first-to-die’s estate must make an election on a timely-filed estate tax return. A timely filed return is a return filed within nine months after death or within fifteen months after obtaining an automatic extension of time to file from the IRS. Normally a federal estate tax return is only due if the gross estate plus the amount of any taxable gifts exceeds the applicable exclusion amount (up to $5.45 million in 2016).  However, in order to be able to elect portability, a federal estate tax return would have to be filed even if the value of the first-to-die’s estate was below the exclusion amount.  

The problem occurs, in the situation you describe, when the first spouse dies, and no estate tax is filed.  In that event, the second to die spouse could not use the deceased spouse’s unused exemption.   The question is whether or not it is too late to use your father’s exemption.  

In June 2015 the IRS issued its final regulations on portability. The final regulations make clear that there may be relief available.  The question turns on whether or not the first estate it was required to file an estate tax return. In the instance where the first spouse’s estate was taxable and required to file an estate tax return (because the value of the estate was over the exclusion amount), and the time to file has passed, and no relief is available.  The IRS cannot extend the time to file and elect portability. 

If the estate was not required to otherwise file an estate tax return because the value of the estate was below the exclusion amount, then the IRS may grant relief via a private letter ruling. A private letter ruling, or PLR, is a written statement issued to an individual taxpayer that interprets and applies tax laws to the taxpayer’s particular set of facts.  A PLR is issued in response to a taxpayer’s written request and may not be relied upon as precedent by other taxpayers.   When seeking a PLR allowing the estate to file late portability election, there are some burdens that must be met.  First, the election must be made by the representative or the estate, which may or may not be the surviving spouse.  The representative will have to show that he or she acted in good faith and that this ruling will not prejudice the interests of the government. This taxpayer would have to show that there was either an oversight in handling the first spouse’s estate or the taxpayer obtained bad advice from an accountant or attorney.

For estates where the first spouse died after January 1, 2011, portability can be a valuable estate planning tool to save a significant amount of federal estate tax on the death of the second spouse.  If a surviving spouse has assets that are close in value to the current federal exclusion amount, it is important to examine the records of the deceased spouse to make sure that a portability election was made on a timely filed federal estate tax return. If no return was filed, and no estate tax return was required to be filed, it may not be too late to apply to the IRS for a private letter ruling.

By: Nancy Burner, Esq. & Kera Reed, Esq. 

Burner Law Group, P.C.

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