Portability—Act Now to Correct Missed Elections

Revenue Procedure 2017-34,¹ issued on June 26, 2017, provides two new forms of administrative grace, one allowing all “past” missed portability elections to be fixed and one allowing “future” missed portability elections to be fixed. There are limits on this administrative grace, however.

Portability is potentially helpful for the surviving spouse of any individual dying after December 31, 2010. Yet, since the enactment of portability, there have been many missed elections for a variety of reasons. For instance, some estate representatives and surviving spouses received no advice about portability, or poor advice. In other instances, advisors may have been poorly informed about portability and therefore failed to advise their clients. Yet, in other cases, the time periods were missed by mistake or miscommunication between advisors and clients. Regardless of the reason, missing the election could be very costly because the election is potentially worth up to $2,196,000 in estate-tax savings ($5.49 million estate-tax exclusion in 2017 multiplied by the 40 percent estate-tax rate in 2017). 

“Past” Missed Portability Elections

The new administrative grace applies to small estates—those estates below the threshold for being required to file a federal estate tax return.² For these small estates that missed making a “past” portability election, the Revenue Procedure provides that the individual’s estate may file an estate tax return to make the portability election, as long as the return is filed prior to January 2, 2018.³

As initially enacted, the rules were unclear about how the election would be made, and the deadline for making the election was ambiguous for small estates.⁴ Eventually, the Internal Revenue Service issued guidance indicating that an estate tax return must be filed to make the portability election—even though such return was otherwise unnecessary. So naturally some taxpayers and professional tax advisors were confused. Thanks to this new Revenue Procedure, however, accountants and attorneys who’ve been sued for their role in missed portability elections may have new reason for hope that the damages can be mitigated.

This new IRS procedure allows every small estate that missed the portability election since the date of to go back and make the election. We can’t stress enough this new procedure’s importance!

Even if the estate representatives initially consider making the portability election, and for whatever reason decided not to do so, the estate representatives can, and should, now reconsider that initial decision based on the current circumstances. This new Revenue Procedure provides a second “bite at the apple.” All personal representatives and surviving spouses should be advised of this new development regarding “past” missed portability elections.

“Future” Missed Portability Elections

The second administrative grace relates to missed portability elections in the “future,” again only for small estates. The IRS will allow the portability election to be made on an estate tax return filed by the second anniversary of the taxpayer’s death. Therefore, the estate representatives have two years following death to make the election, rather than just nine months, which is the ordinary deadline for filing an estate tax return, or 15 months if the time for filing the estate tax return has been properly extended. Going forward, this two-year administrative grace period is permanent.⁵

Endnotes

1. Internal Revenue Bulletin 2017-26 (June 26, 2017).

2. Essentially, for those decedents with gross estates plus adjusted taxable gifts that don’t exceed the basic exclusion amount of $5 million, which has been indexed for inflation since 2010. For 2017, the basic exclusion amount is $5.49 million.

3. Nothing written here applies to large estates—those that were in the past or are required in the future to file an estate tax return. A different set of rules applies to large estates, not addressed in the Revenue Procedure and not addressed here.

4. Not to toot our own horn, but my partners and I were instrumental in bringing the importance of several issues to the attention of the IRS. I wrote an article that explained there was no deadline for filing an estate tax return for a small estate, and therefore the time for making the portability election was unclear. See Lester B. Law, “Portability Election: There May Be No Due Date for Smaller Estates,” LISI Estate Planning Newsletter #1885 (Nov. 1, 2011). Acknowledging the statutory glitch, Treasury responded by issuing its then-proposed regulations (which are now final), which clarified that in order to seek the benefits of portability, the election must be made on an estate tax return that must be filed within 9 months of death (or 15 months, if extended). See Treas. Reg. 20.2010-1(a). 

5. Of course, administrative grace granted by the government can be withdrawn by the government.