The IRS has released a new rule that will simplify the method for estates to obtain an extension of time to make the estate tax portability election.  Known as Revenue Ruling 2017-34, this new rule will ease up on surviving spouses who failed to take advantage of their deceased spousal unused exclusion amount (DSUE) in a timely manner. 

Background on the Federal Estate Tax and Portability

The federal government imposes an estate tax on the value of your assets when you die. For 2017, the exemption is $5,490,000. This exemption is cumulative, meaning taxable gifts made during one’s lifetime will use part of the exemption.

For any year after 2010, a deceased spouse’s exemption can be ported to the surviving spouse, meaning a total of $10,980,000 could potentially be exempt from estate tax. This ported exemption is the DSUE, and it required the filing of a return for the estate of the deceased spouse, even if that estate is too small to otherwise require filing.

After the portability provision in 2010 was enacted, the IRS gave filers a simplified way to obtain an extension for filing their estate tax return through December 31, 2014.

However, it seems many people still missed the 2014 deadline, and the IRS was inundated with requests for private letter rulings to allow late elections – and those aren’t cheap! (For taxpayers in 2017 with an income of $1 million or more, a private letter ruling will cost them $10,000).

Ruling 2017-34

The new ruling offers relief to the estates of those who died after 2010 and did not file an estate tax return. In order to qualify for the automatic extension, these are the requirements that must be met:

1. The taxpayer is the executor of the estate of a decedent who:

•  Died after December 31, 2010
•  Has a surviving spouse
•  Was a citizen of the United States upon date of death

2. The taxpayer is not required to file an estate tax return as determined by their gross estate and adjusted taxable gifts value
3. The taxpayer did not file an estate tax return within the time allotted by Reg. § 20.2010-2(a)(1) for filing an estate tax return required to elect portability
4. The executor must file a complete Form 706 no later than January 2, 2018, or the second annual anniversary of the decedent’s death
5. The executor filing Form 706 must state at the top of the form that the return is “Filed Pursuant to Rev. Proc. 2017-34 to Elect Portability Under Code Sec. 2010(c)(5)(A)

Letter Rulings Pending

If a letter ruling was still pending by June 9, 2017, the IRS will close the file and refund the fee paid. The estate that asked for the letter ruling will now need to follow the Revenue Ruling 2017-34 procedure to obtain the exclusion.

If you are nominated as the executor of an estate and have questions about the new ruling, we encourage you to speak with your attorney and tax professionals.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Walsh & Associates and LPL Financial do not provide tax or legal advice or services.

Source: IRS Rev. Proc. 2017-34 https://www.irs.gov/pub/irs-drop/rp-17-34.pdf