Listen Up 2011, 2012 & 2013 U.S. Estates – Don’t Miss Out on the Portability Election

The clock is quickly ticking away for the estates of certain married U.S. taxpayers who died between January 1, 2011 and December 31, 2013.

What will happen to these estates when the clock strikes midnight on January 1, 2015?  They will no longer have the ability to make a “late” portability election with regard to the federal estate tax exemption.

What is the Portability Election and How is it Made?

Portability started with the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  Under this law, a surviving spouse was allowed to add their deceased spouse’s unused federal estate tax exemption to their own exemption and apply the combined exemptions (up to a total of $10 million in 2011 and $10.24 million in 2012) to gifts made during life and/or transfers made after death. Portability was supposed to disappear in 2013, but the American Taxpayer Relief Act of 2012 made it permanent for deaths occurring in 2013 and beyond.

In order to make the portability election, the executor of the estate must timely file a federal estate tax return (IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) and include the portability calculation.  Form 706 is timely filed if it is filed either (i) within nine months after the date of death, or (ii) by the last day of the period covered by an extension, whichever is later.

What Are the Special Rules for Making the Late Portability Election?

The uncertainty surrounding the future of portability coupled with the June 2013 U.S. Supreme Court decision in the case of Windsor v. United States (which held that Section 3 of the Defense of Marriage Act is unconstitutional and prompted Treasury and the IRS to issue a ruling that same sex married couples will be treated as married for all federal tax purposes, including making the portability election) led to a lot of confusion and inevitably the failure of many executors to make the portability election.

In response to this confusion, Rev. Proc. 2014-18 was issued in early 2014 which allows an executor to make a “late” portability election on or before December 31, 2014 if the estate meets the following criteria:

  1.  The taxpayer must be the executor of the estate of a decedent who was survived by a spouse; died between January 1, 2011 and December 31, 2013; and was a citizen or resident of the U.S. on the date of death; and
  2. The estate was not required to file a federal estate tax return; and
  3. The estate did not file a federal estate tax return; and
  4. A person permitted to make the portability election on behalf of the decedent files a federal estate tax return on or before December 31, 2014; and
  5.  The person filing the federal estate tax return states at the top of the return that it is being “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).”
What Should You Do?

If you’re not sure if making the “late” portability election applies in your situation, hurry up and check with your estate planning attorney or accountant because the clock is ticking!

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