Estate Exclusion Portability Regs Confirm Critical Deadline

June 22, 2012
By Kaye A. Thomas

Pay attention, because missing this deadline could cost $1 million or more. And for some people, the deadline is today.

The Treasury has issued temporary and proposed regulations relating to portability of a deceased spousal unused exclusion amount. Under these rules it may be critically important to file an estate tax return for an individual who dies with a surviving spouse, even if the decedent has no valuable assets and an estate tax return is not otherwise required. Filing an estate tax return is the only way to transfer the decedent’s unused estate tax exclusion amount to the surviving spouse. People handling estates in this category may not realize there is any need to file an estate tax return, yet failing to do so could permanently deprive the surviving spouse of an increase in the estate tax exclusion amount that might otherwise produce savings of $1 million or more in estate and gift taxes.

Who needs to be concerned?

This issue is important whenever all of the following are true:

  • A decedent died after 2010 with a taxable estate that is less than the estate tax exclusion amount. The exclusion amount is $5,000,000 for 2011 and $5,120,000 for 2012, so this applies to more than 99% of decedents dying in those years.
  • The decedent has a surviving spouse.
  • There is a possibility that the surviving spouse will eventually die holding assets exceeding the estate tax exclusion amount.

In evaluating the third point, bear in mind that current law calls for the estate tax exclusion amount to revert to $1,000,000 after 2012. It seems likely that Congress will pass legislation preventing this figure from dropping to that level, but a compromise in which it reverts to a figure below $5,000,000 is possible.

Example:┬áJim died in 2011 survived by his wife, Jane, leaving a taxable estate of $2,000,000. Jim’s estate is not required to file an estate tax return, but doing so is the only way to transfer Jim’s unused estate tax exclusion ($3,000,000) to Jane. If Jane subsequently dies with an estate large enough to incur federal estate tax, failure to file an estate tax return for Jim’s estate may result in as much as $1,000,000 or more in increased estate tax at Jane’s death.

What’s the deadline?

For some people the deadline has already passed, and for some, the deadline is today. Due to a quirk in these rules, you could be out of luck for a decedent who died in August 2011 but still have time to file for a decedent who died in June 2011. That’s a bizarre result, but that’s the way it works.

Here’s how it happened. The normal deadline for filing an estate tax return is nine months after the date of death. A six-month extension is available if the executor files Form 4768, so the total time available may be 15 months. Yet executors and others dealing with estates of decedents who died in 2011 were in many cases unaware of the need to act. Before this law took effect there was no reason to file an estate tax return in circumstances where the taxable estate fell comfortably within the exclusion amount. Seeing no need to file an estate tax return, executors also saw no need to file for an extension. Final deadlines began to arrive in October 2011. Practitioners requested relief, and the IRS issued Notice 2012-21. In effect, this Notice permits executors of certain estates to obtain the six-month extension for filing Form 706, the federal estate tax return, even if they failed to file Form 4768 before expiration of the initial nine months. There are two big gotchas, though:

  • Even with this relief, the total time available for filing the estate tax return is still limited to 15 months. This means the time in which this action had to be taken expired for some estates before the regulations were issued in June 2012. And if you happen to be dealing with the estate of a decedent who died exactly 15 months ago, your deadline to act is today.
  • This relief applies only to estates of decedents who died in the first six months of 2011. This means you still have time to act if the decedent died in May or June 2011, but if the date of death was in July or August 2011 your deadline has passed unless you filed for a six-month extension within the relevant nine-month period. If you happen to be dealing with the estate of a decedent who died exactly 9 months ago and haven’t yet filed for an extension, your deadline to act is today.

My opinion, for what it’s worth (which in this case I’m afraid is close to zero), is that the relief provided in Notice 2012-21 should have been made available until 90 days after publication of the temporary regulations.

What you need to do

If you’re dealing with an estate for which the fifteen-month period is soon to expire, you need to determine immediately whether there is a potential benefit in filing an estate tax return so that the unused exclusion amount can be transferred to a surviving spouse. If so, you need to act right away, preparing and filing an estate tax return together with Form 4765 in accordance with the special instructions provided in IRS Notice 2012-21.

If you’re dealing with an estate for which the nine-month period is about to expire and you need time to evaluate this issue, file Form 4765 to obtain a six-month extension. The relief provided in Notice 2012-21 doesn’t apply to estates of decedents dying after June 30, 2011.

More information

We’ll be offering more details on how the portability rules work. If you need to take action before then you should refer to the official guidance:

Please follow and like us:

Sign up for our FREE NEWSLETTER