If you are a recent widow(er) (since after 2010) and you did not file an estate tax return for your deceased spouse,
you may benefit from recent guidance from the Internal Revenue Service.
Each U.S. citizen is allowed an estate tax exemption of approximately $5 million and thus a married couple would have the ability to shelter approximately $10 million from estate taxes. The exemption amount changes annually based on inflation and the current amount for 2017 is $5.49 million. Prior to 2011, estate plans used trusts in order to effectively utilize both spouse’s estate exemption. After 2010, the estate tax laws have allowed for the transfer of a deceased spouse’s estate tax exemption to their surviving spouse (without the use of a trust). The transfer of the estate tax exemption only occurs if the estate properly filed a Form 706 estate tax return to make that election – called the portability election. Some taxpayers have failed to make this advantageous election so the IRS has provided some relief.
Revenue Procedure 2017-34 grants certain estates an additional opportunity to make an estate tax portability election to save estate taxes upon the future death of a surviving spouse. This is available for U.S. citizens who:
- Died after 2010,
- Left a surviving spouse,
- Was not required to file an estate tax return based on the value of the estate (including adjustable taxable gifts), and
- Did not already file an optional estate tax return Form 706
The estate has until the later of January 2, 2018 or the 2 year anniversary of the date of death to file an estate tax return to make the portability election.
D died on March 15, 2012 leaving the entire estate to a surviving spouse S. D’s individual assets and share of the joint assets was $3 million. D had made no taxable gifts during D’s lifetime and thus has no Form 706 filing requirement since the share of assets are less than the 2012 estate exemption of $5.12 million. Because of the unlimited marital deductions, there is no tax due at the death of D. In this case, S may not have realized the availability or benefit of making the estate tax portability election.
Next, assume S also has additional individual and joint assets totaling $4 million. If S were to die in 2017, the total estate would be $7 million and an estate tax would be due since the available 2017 estate tax exemption is $5.49 million (S’s single estate tax exemption). However, if S had used Revenue Procedure 2017-34 to file an estate tax return to elect portability of the estate tax exemption, the potential estate tax due at S’s death would be zero since the available exemption would be $10.61 million (combining both S & D’s available estate tax exemptions).
Further, a joint estate that was believed to be below the exemption amount could grow over time (due to investment return or an inheritance) to exceed the estate tax exemption in the future. These estates may also benefit from making a portability election under the Revenue Procedure.
Please contact your SVA advisor to see if applying this new procedure would be advantageous to your tax situation.