IRS simplifies surviving spouse portability election

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The Internal Revenue Service has released a revenue procedure that offers an easier way to get an extension of time to file a return to opt for portability of the deceased spousal unused exclusion amount.

Revenue Procedure 2017-34 applies to estates that aren’t typically required to file an estate tax return because the value of the gross estate and adjusted taxable gifts is under the filing threshold. The first $5,490,000 (under the 2017 exemption) is excluded for federal estate tax purposes. This is a cumulative lifetime exemption, so taxable gifts made during a taxpayer’s lifetime use part of the exemption. After a taxpayer’s death, the rest of the exemption amount is applied to the remaining estate.

For federal estate tax purposes, if taxpayers follow the proper compliance procedures, they can “port” the exemption of the first spouse to the second spouse for all deaths after 2010, according to Lisa Rispoli, partner-in-charge of trust and estate services at Grassi & Co., in a note to clients Monday. This provides for the availability of approximately $10,980,000 in assets to be exempt from estate tax. The exemption ported is known as the “deceased spouse unused exemption,” or DSUE.

“This portability election requires the filing of a return for the estate of the first deceased spouse, even if that estate is too small to require filing otherwise,” Grassi & Co. noted. “It must be elected on a timely filed return, including extensions.”

In the earlier years after the DSUE portability provisions were originally enacted, the IRS provided a simplified method for getting a time extension to make the portability election for estates that wouldn’t normally need to file an estate tax return. But that simpler method was only available up until the end of 2014.

After Dec. 31, 2014, the IRS has issued several letter rulings to allow some estates to make a portability election if they missed the deadline for filing and weren’t otherwise required to file. But it involved paying a substantial fee (now as high as $10,000) to the IRS.

The new revenue procedure provides a less expensive and simpler way to make the election. For estates of people who died between Jan. 1, 2011 and Jan. 2, 2016 (and who aren’t otherwise required to file an estate tax return and missed the deadline for timely filing) the election can be made up until Jan. 2, 2018. Estates of people who died after Jan. 2, 2016, can make an election up to two years after the date of death.

For the surviving spouse, the tax savings for making this election is significant, Grassi noted, as much as $2.2 million.

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