IRS Issues Final Regulations for Estate Tax Portability Elections

On June 12, 2015 — nearly 3 years after issuing temporary regulations — the IRS issued spousal portability election final regulations (read TD 9725 at the Federal Register here).

The final regs don’t vary significantly from the temporary regs, but they do serve as an excellent reminder that spousal portability will be permanently waived unless the election is made on a timely and properly filed Federal Estate Tax Return (“FET” Form 706).

I wrote about estate tax portability back in February 2014 in a post entitled “Portability: The Tax Election Every Surviving Spouse Must Consider.” I think that title still sums this up well. I discuss this election each and every time I work on an estate with a surviving spouse.

In brief, a portability election allows a surviving spouse to increase his or her gift/estate tax exemption by the amount of the deceased spouse’s unused exemption (the “DSUE”).

For example, if Bill dies in 2015 leaving his entire estate to his wife Jane, then Bill’s DSUE amount available to Jane (and then her estate) is $5,430,000 (the estate tax exemption in 2015). But there’s no such thing as a joint estate tax return. So how does the IRS knows how much of Bill’s DSUE to credit to Jane? Bill’s executor has to tell them. More specifically, Bill’s executor must make the DSUE election on a timely filed Form 706 FET. If timely and properly filed and elected, then Jane’s lifetime and estate tax exemption is increased (at least doubled) by $5,430,000 — Bill’s DSUE amount.

The due date for the FET? 9 months after Bill’s death (plus 6 months if an extension is requested). In other words, Jane cannot wait to see if the election is actually needed later. And Jane’s executor cannot wait until after Jane’s death to file Bill’s FET (unless Jane dies within 15 months of Bill).

The final regulations hint that a late election “can potentially qualify” for so-called “Section 9100 relief” in certain (as yet unspecified) situations, but:

• 9100 relief is very expensive ($9,800) to request; and
• Relief is uncertain and probably very limited.

The generous extension of time previously granted to all estates from 2011 through 2013 is no longer available.

In response to taxpayer comments, the final regulations also provide that:

1. The 706 must be “completely and properly prepared,” including the computation of the DSUE amount; and

2. There will be no “short-form” (or ‘EZ’ form) for the 706 (Also see “IRS declines to make estate tax easy for surviving spouses“, by Roth & Company, PC).

Consequently, a professional with experience in preparing 706’s should be timely engaged.

How much does it cost to prepare? As with many things: it depends. It depends largely on: (a) the complexity of the situation and the estate plan, (b) the number of different assets requiring listing and valuation, and (c) how well-organized and thorough the client is. I’ve done some portability 706’s in as few as 2 to 3 attorney hours. Others have taken a lot more time to prepare because the estate and assets are more complicated.

The decision whether to file is really a risk assessment and cost-benefit analysis. The benefit? Potentially millions of federal estate tax saved after the surviving spouse’s death. Some factors to consider in deciding whether the spouse’s estate might need the additional estate tax exemption:

• Current and projected size of spouse’s estate
• Age of surviving spouse (younger = more time to build larger estate)
• Investment, employment and entrepreneurial prospects of surviving spouse
• Prospects for spouse receiving a sizable inheritance
• Opinion as to whether exemption might be reduced
• Other (the lottery winner?)

You might look at the election as a relatively cheap insurance policy against a future taxable estate. My opinion? When in doubt — file it!

Bonus Estate Tax News: Since you made it all the way through my post, I figured I’d ‘treat’ you to an additional bit of estate tax news (although if this were October 31 you might deem this more a trick than a treat). The IRS recently announced — via its website FAQ on Estate Taxes page — that (for estate tax returns filed on or after 6-1-15) ‘closing letters’ will be issued only “upon request.” Under the new procedure, the taxpayer (the estate) must wait at least 4 months and then may request (in an as yet unspecified manner) an estate tax closing letter. A perplexing bit of news for those of us in the estate tax preparation community who have grown accustomed to eagerly awaiting the mailed receipt of that magic piece of paper that allows the executor or trustee of a taxable estate to achieve a sense of closure and complete administration.

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