Portability
Since the concept of “portability” was made permanent in the Taxpayer Relief Act of 2012, it has been an essential and beneficial estate planning tool. Portability allows a decedent to carryover his or her unused estate and gift tax exclusion amount ($5.49 million in 2017) for use by the surviving spouse’s estate. Thus, if a decedent has not used all of his or her estate and gift tax exclusion during life, the surviving spouse can use the balance of the deceased spouse’s unused exclusion. Because the unlimited marital deduction allows assets to pass to the surviving spouse free of tax on the first death without using any estate tax exclusion, for a married couple leaving everything to each other, the surviving spouse is able to shelter $10.98 million from estate tax. To elect portability, the surviving spouse must timely file an estate tax return (within nine months of the decedent’s death).
Relief for Late Elections
Effective as of June 9, 2017, the Internal Revenue Service (“IRS”) issued temporary relief to executors who file a late estate tax return to elect portability, so long as an estate tax return was not required to be filed under I.R.C. §6018(a), meaning the gross estate plus adjusted taxable gifts were not over the exclusion amount in the year of death. Rev. Proc. 2017-34 provides a simplified method for certain taxpayers to receive an extension to make a late portability election and extends the deadline to make the late portability election if an estate tax return was not timely filed. The late filing procedure outlined in Rev. Proc. 2017-34 is intended to be used in lieu of private letter rulings, which are expensive for the taxpayer and inefficient for the IRS, especially considering the number of taxpayers seeking to file late portability elections.
Under Rev. Proc. 2017-34, if an executor of an estate was not required to file a return because the value of the decedent’s gross estate plus adjusted taxable gifts was not over the exclusion amount, but the executor now wants to elect portability, the executor has until the later of January 2, 2018 or the second anniversary of the decedent’s date of death to do so. The relief provided in Rev. Proc. 2017-34 is only available if the following conditions are met:
- The decedent was a U.S. citizen or resident who died after December 31, 2010, survived by a spouse;
- The executor was not required to file an estate tax return under § 6018(a) based on the size of the gross estate and adjusted taxable gifts;
- The executor did not file an estate tax return within nine months of the decedent’s date of death or within the time granted for an extension;
- The executor files the estate tax return before the later of January 2, 2018 or the second annual anniversary of the decedent’s date of death; and finally
- The executor files the estate tax return with the following text at the top of the Form 706: “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A)”.
Determining When to Elect Portability
While Rev. Proc. 2017-34 explicitly declined to create permanent or unlimited relief for late portability elections, it does provide relief from the expense of filing a private letter ruling to make the late election. To avoid reliance on the temporary relief provided under Rev. Proc. 2017-34, however, it is important for executors to file a timely estate tax return if the couple’s assets indicate that portability may be beneficial to the surviving spouse. Among other things, some important factors to consider in deciding whether to elect portability are the size of the combined estate of the decedent and surviving spouse, the size of the decedent’s estate and the amount of unused exemption that would be available after taking into account lifetime gifts and assets that would qualify for the marital deduction, the potential growth of the surviving spouse’s assets (and how much long term care costs might eat into this growth), and the age and health of the surviving spouse. Generally, if it is a close call, it is more beneficial to the client to pay to file the return and elect portability rather than risk owing 40% in taxes on the amount in excess of the surviving spouse’s exclusion at his or her death.
GST Planning in the Absence of Portability for the GST Exemption
Portability works well to increase the amount a couple can shelter from estate and gift tax, but it is not available to carry over a deceased spouse’s unused Generation Skipping Transfer (GST) tax exemption (also $5.49 million in 2017). If a spouse has over $5.49 million in assets and the couple is especially concerned about passing wealth down to successive generations free from transfer tax, it is important to allocate GST tax exemption amount by or at his or her death, otherwise, the decedent’s GST tax exemption could be wasted.
Consider the following scenario. H has assets totaling $7 million and W has assets totaling $3 million leaving all to each other outright. With portability, they should be able to pass their assets to their children free of estate tax so long as a timely portability election is made. If H dies first, H’s assets would go outright to W (no GST election can be made on these assets going outright) and W then has $10 million in assets when she dies (assuming no appreciation). On W’s death, W’s executor can only use W’s GST exemption to elect to have $5.49 million of the $10 million to pass to W’s children free of GST tax. H’s plan of passing the assets to W free of trust wasted H’s GST tax exemption. Had H created a trust for W and applied his GST tax exemption to that trust, W could have allocated her GST exemption to cover the remaining $4.51 million that otherwise would not have been GST tax exempt at her death.
GST planning is not necessary for every couple and is heavily dependent on the couple’s assets, ages, possible appreciation of assets, and how they want those assets to pass to their children or grandchildren. With the families that need or want GST planning, however, it is as important to plan for the lack of GST portability as it is to plan for estate and gift tax portability.
This article was written by Marcia Broughton and Rebecca Morton. For questions regarding this, or other tax related issues, please contact a member of Jackson Kelly’s Tax Practice Group.