|Rarely do estates get a “second look” at tax decisions. However, this summer the IRS provided some executors, trustees, and surviving spouses an opportunity to revisit an important estate tax planning decision made years ago.
Background: As you probably know, the IRS assesses an estate tax on large estates. The estate tax rate is 40%. Each U.S. citizen and resident has a combined estate and gift tax exemption of $5 million, adjusted by inflation (in 2017 equal to $5.49 million). Most estates are not subject to the estate tax, because of the marital deduction for gifts to (or for the benefit of) surviving spouses, charitable deductions, and the application of the decedent’s estate tax exemption. As a result, the deceased spouse’s estate tax exemption often is not fully used.
For individuals dying in 2011 or after, a decision was made in many cases not to file a federal estate tax return if the combined estate of the decedent and the surviving spouse was less than a single individual’s $5 million (inflation-adjusted) estate tax exemption — no return was required, and it was expected that there would never be an estate tax at the survivor’s death.
Portability: For deaths of the first spouse to die in 2011 and after, federal tax law allows the estate to make the “DSUE” (Deceased Spouse’s Unused Exemption) election, also known as the “portability election.” The DSUE election allows the surviving spouse to use the deceased spouse’s unused estate tax exemption (in addition to his or her own exemption). As you can imagine, the DSUE election can be very useful if the surviving spouse’s estate grows beyond his or her estate tax exemption.
A Second Chance: Recently, some surviving spouses (or their estates) have been surprised by significant increases in asset value and now expect an estate tax liability on the death of the surviving spouse. Thankfully, the IRS recently issued Revenue Procedure 2017-34, which provides a second chance to file a federal estate tax return to elect portability even though the time for filing the federal estate tax return has passed. In other words, there is an opportunity to take a “second look” at earlier planning decisions and claim a significant estate tax benefit.
The portability election must be made on a federal estate tax return filed by January 2, 2018 or the second anniversary of the decedent’s date of death, whichever is later.
Does this affect you? If you administered the estate of a married U.S. citizen or resident who died after 2010 and did not file an estate tax return (and no return was required under the regular filing requirements), you should first check the surviving spouse’s current estate asset values. Remember to include life insurance policies and retirement plans owned by the surviving spouse and the value of any “marital deduction” trusts created for the survivor’s benefit by the first spouse (such as “QTIP” trusts). Do not include the value of tax “bypass” or “exemption” trusts designed to be excluded from the survivor’s taxable estate.
If it is foreseeable that the surviving spouse’s taxable estate will exceed his or her remaining estate tax exemption, then estate taxes are a possibility. Consider also whether a future Congress might reduce the estate tax exemption to an amount less than $5 million (inflation-adjusted).
If you think estate tax on the surviving spouse’s death is a possibility, consider filing a simplified estate tax return to claim the decedent’s unused estate tax exemption, even if the filing would require additional effort and expense.
Estate tax returns take time to prepare, especially when appraisals of real property and business interests are required. Now is the time to act if you want to take advantage of this second chance to claim a significant estate tax benefit.
(Thank you to fellow estate planning attorney Tim Maximoff for this post.)