IRS Extends Portability Election Deadline for Surviving Spouses

The Internal Revenue Service has issued new rules providing an automatic extension of time for certain estates without a filing requirement to elect portability of the decedent’s unused exclusion amount for the benefit of the decedent’s surviving spouse.

The new rules can also now benefit surviving spouses of same-sex marriages in the aftermath of the Supreme Court’s landmark decision in the U.S. v. Windsor case.

Revenue Procedure 2014-18 provides a simplified method for certain taxpayers to obtain an extension of time to make a “portability” election under which a decedent’s unused exclusion amount (that is, the deceased spousal unused exclusion amount, or DSUE amount) becomes available to apply to the surviving spouse’s subsequent transfers during their life or at death. The IRS noted that no user fee is required for submissions filed under this revenue procedure.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 amended the Tax Code to allow the estate of a decedent who is survived by a spouse to make a portability election, which allows the surviving spouse to apply the decedent’s DSUE amount to the surviving spouse’s own transfers during life and at death. The portability election applies to estates of decedents dying after Dec. 31, 2010, if the decedent was survived by a spouse.

The portability provisions were originally scheduled under the 2010 law to expire on Jan. 1, 2013, but the American Taxpayer Relief Act of 2012 made the portability permanent. The exclusion amount used to determine the credit amount has been defined as the sum of the basic exclusion amount and, in the case of a surviving spouse, the DSUE amount. The basic exclusion amount is $5 million, as adjusted for inflation in each year after 2011. The DSUE amount is the lesser of either the basic exclusion amount, or the excess of the applicable exclusion amount of the last deceased spouse of the surviving spouse over the amount with respect to which the tentative tax is determined for the estate of the deceased spouse.

There are some requirements that the executor of the estate of a deceased spouse must satisfy to allow the surviving spouse to apply the decedent’s DSUE amount to the surviving spouse’s transfers. In particular, the executor of the estate of the deceased spouse must elect portability of the DSUE amount on a Form 706, which must include a computation of the DSUE amount. A portability election is effective only if it is made on a Form 706 filed within the time prescribed by law, including extensions.

In June 2012, the Treasury Department and the IRS issued temporary regulations under which the portability provisions have retroactive effect, applying to estates of decedents dying on or after Jan. 1, 2011.

The due date of an estate tax return required to elect portability is nine months after the decedent’s date of death, or the last day of the period covered by an extension, if an extension of time for filing has been obtained from the IRS.

However, the Supreme Court’s decision in U.S. v. Windsor and Rev. Rul. 2013-17, which the IRS issued in response to the Windsor decision, allow more time for making the election. In the decision, the Supreme Court struck down Section 3 of the Defense of Marriage Act, under which the term “marriage” had been defined as a legal union between one man and one woman. In the Windsor case, the Supreme Court held that Section 3 of DOMA was unconstitutional because it violated Fifth Amendment principles.

Prior to the Windsor decision, the IRS interpreted Section 3 of DOMA as prohibiting it from recognizing same-sex marriages for purposes of determining the marital status of taxpayers under the Tax Code. Accordingly, prior to the Windsor decision, the surviving spouse was not treated as the decedent’s surviving spouse for portability purposes if the surviving spouse was of the same sex as the decedent.

Subsequently, the IRS issued Rev. Rul. 2013-17 last year to provide guidance on the effect of the Windsor decision on the agency’s interpretation of sections of the Tax Code referring to taxpayers’ marital status. Under Rev. Rul. 2013-17, for federal tax purposes, the terms “spouse,” “husband and wife,” “husband,” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes such a marriage between individuals of the same sex.

For federal tax purposes, the IRS has adopted a general rule recognizing a marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages. Affected taxpayers can rely on Rev. Rul. 2013-17 for filing original tax returns, amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax, provided the applicable limitations period for filing has not expired. If an affected taxpayer files an original return, amended return, adjusted return, or claim for credit or refund, all the items required to be reported on the return or claim that are affected by the marital status of the taxpayer must be adjusted to be consistent with the marital status reported on the return or claim.

In general the revenue procedure issued Monday by the IRS applies only if the taxpayer is the executor of the estate of a decedent who (a) has a surviving spouse; (b) died after Dec. 31, 2010, and on or before Dec. 31, 2013; and (c) was a citizen or resident of the U.S. on the date of death. Taxpayers can get an extension of time to file Form 706 without needing to get a private letter ruling as long as they file by Dec. 31, 2014.

The person filing the Form 706 on behalf of the decedent’s estate must state at the top of the Form 706 that the return is “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).”

Taxpayers can also claim a credit or refund for estate taxes they have overpaid in past years, but the statute of limitations for doing that is within three years of filing Form 706, which will be helpful for couples who are affected by the Windsor decision.

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