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IRS gives another chance for missed “portability” elections

Did you, a friend or a family member miss a deadline to make a “portability” election? The IRS has issued Revenue Procedure 2014-18, extending the time for certain taxpayers to make the election to December 31, 2014.

An important tax relief provision of the American Taxpayer Relief Act of 2012, also called the “fiscal cliff” tax legislation, enacted during January, 2013 was to make “portability” of the estate and gift tax exemption permanent. With portability, any unused estate and gift tax exemption of the last previously deceased spouse can be used for the estate and gift tax returns of a surviving spouse.

For example, John Smith was deceased on January 1, 2014, leaving all of his property to his wife, Mary. John didn’t make any taxable gifts during his lifetime. If Mary (who also made no taxable gifts during her lifetime) makes the portability election and is deceased on December 31, 2014, the total exemption for her federal estate tax return is her exemption of $5,340,000 plus John’s of $5,340,000, or a total of $10,680,000.

In order to have an effective portability election, a timely federal estate tax return must be filed for the deceased spouse. The IRS has published temporary regulations simplifying the requirements for reporting on a Form 706 only filed to make the election.

Many families may have missed the election because a federal estate tax return wasn’t otherwise required, and the portability election was scheduled to expire after December 31, 2012.

The IRS has now granted a blanket extension of time to file Form 706 in order to make a portability election provided

1. The taxpayer is the executor of the estate of a decedent who:
a. has a surviving spouse;
b. died after December 31, 2010 and on or before December 31, 2013; and
c. was a citizen or resident of the United States on the date of death.

2. The taxpayer was not required to file an estate tax return, as determined based on the value of the gross estate and adjusted taxable gifts;

3. The taxpayer did not file an estate tax return required to elect portability; and

4. Other requirements of the Revenue Procedure are met, including filing a properly-prepared Form 706 by December 31, 2014, with the statement at the top of page one, “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER SECTION 20.2010-25(a)(7).

Note that this procedure doesn’t apply to an estate that previously filed an estate tax return to make a portability election.

Executors and trustees who think the families or beneficiaries of a decedent might benefit from this Revenue Procedure should consult with their legal and tax advisors.

Tax and financial advice from the Silicon Valley expert.