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George F. Bearup, J.D. Senior Legal Trust Advisor

22-Mar-21

Portability Elections – Time to Revisit

Take-Away: A portability election is a powerful tool to avoid federal gift or estate taxes. The timing of the portability election is critical. Whether a decedent’s estate is taxable or not controls whether a ‘late’ portability election can be made.

Caution: This missive is technical. Please don’t kill the messenger.

Background: A portability election permits a surviving spouse to use the deceased spouse’s unused exclusion amount, or DSUEA. The decedent’s estate must formally make a portability election. [IRC 2010(c)(5)(A).] Obviously, the portability of the decedent’s unused estate and gift tax exemption provides the opportunity of the surviving spouse to make more lifetime gifts, or to shelter more of the survivor’s estate from federal estate taxes on his or her subsequent death. In short, a portability election is a tremendous tool that can be effectively used to avoid federal transfer taxes.

Timely Election: However, making  a portability election is more complicated than it sounds. The statute says that a portability election must be made on a timely filed and complete and properly prepared federal estate tax return, or Form 706. [Regulation 20.2010-2(a)(2).] Yet a decedent’s estate is not required to file a federal estate tax return if the value of the decedent’s gross taxable estate falls below a threshold dollar amount. [IRC 6018(a).] If no federal estate tax return is filed, there is no portability election. As a result, there can be a situation where there is no federal estate tax due on a decedent’s death, e.g. all the decedent’s assets are transferred to the decedent’s surviving spouse and are sheltered due to the unlimited federal estate tax marital deduction, yet the surviving spouse may need to use the decedent’s unused federal estate tax unused exclusion amount to shelter his or her own federal estate tax liability years later. Consequently there may be no urgency to file a federal estate tax return because no federal estate tax is due, yet an estate tax return must be filed (time, money, hassle) in order to make a timely portability election.

Request for Extension in Which to File Election: Often a decedent’s estate, for a variety of reasons, will not timely file a Form 706 Federal estate tax return to make a portability election. As a result, the estate is then left filing with the IRS a request for an extension of time in which to make a portability election. [IRC 301.9100-3.]

Regulatory v Statutory Due Dates: This is where things get complicated. The IRS (or more accurately its Commissioner) possesses discretion to grant a reasonable extension of time in which to make an election to extend a regulatory due date. [IRC 301.9100-1(c).] In the case of a statutory due date, any extension of time in which to make an election is limited to six months. Thus, a due date that is prescribed by regulation can be granted by the IRS in its discretion when the estate provides evidence that it acted reasonable and in good faith, and the grant of the extension of time in which to file the election will not prejudice the interests of the government. [IRC 301.9100-3.] If the due date prescribed is set by statute, not regulation, then the IRS cannot in its discretion extend the time in which to file a tax return on which an election is made.

Private Letter Ruling 202107003 Released February 19, 2021: These rules were addressed in this recent private letter ruling where a late portability election was sought by the decedent’s estate.

  • Facts: The taxpayer was a surviving spouse. It was claimed that based on the value of the deceased spouse’s estate, and taking into account any taxable gifts, the decedent’s estate was not required to file a federal estate tax return. [IRC 6018(a).]  Apparently no federal estate tax return was filed and thus no portability election was made to benefit the surviving spouse. Long after the deceased spouse’s death,  the decedent’s estate submitted a request for an extension of time in which to make a timely portability election. [IRC 301.9100-1(c).]
  • IRS: The IRS granted the decedent’s estate a 120 day extension in which to make a timely portability election, by filing a complete and properly prepared From 706. In providing this favorable ruling to the decedent’s estate the IRS observed:

In this case, based on the representation as to the value of the gross estate and any adjusted taxable gifts, the time for filing the portability election is fixed by the regulations. Therefore, the Commissioner has discretionary authority under Section 301.9100-3 to grant an extension of time for Decedent’s estate to elect portability, provided  Decedent’s estate establishes it acted reasonably and in good faith, the requirements of Sections 301.9100-1 and 301.91003 are satisfied, and granting relief will not prejudice the interests of the government…..

If it is later determined that, based on the value of the gross estate and taking into account any taxable gifts, Decedent’s estate is required to file an estate tax return pursuant to IRC 6018(a), the Commissioner is without authority under Section 301.9100-3 to grant an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void.

  • Summary: Therefore, if the decedent’s gross estate was not large enough to require a Form 706 to be filed, the IRS possesses the discretion to grant an extension of time for a late-filed Form 706 on which a timely portability election is made. In contrast, if the decedent’s estate was large enough in value to be required to file a Form 706, then the IRS did not possess any discretion in which to extend the time in which to file a Form 706 on which a portability election could be made. The extension of time in which to file the return, and make the portability election, thus turns on the size of the decedent’s estate, which can be a challenge if there are hard-to-value assets owned by the decedent or the value of lifetime gifts are uncertain, or the application of the IRC 2036 might cause phantom values to be included in the decedent’s gross estate.

Conclusion: The last couple of years have led many to be less concerned, if not relaxed,  with regard to federal estate tax exposure due to the $11.7 million gift and estate tax exemption each individual possesses. Many estates may not have been too concerned about making a portability election on a timely filed Form 706 due to the size of the survivor’s own exemption amount and the desire to avoid the cost to prepare and file a Form 706 on which a portability election must be made. With all of the current chatter of a Congressionally reduced applicable exemption amount going from $11.7 million to $3.5 million per person, particularly if such tax law changes are retroactive to the first of this calendar year, it is time to reconsider filing a Form 706 on which a timely portability election is made. While it is nice to know that the IRS possesses discretion to extend the time in which to make a portability election on a late-file Form 706, if any federal estate tax is due on the decedent’s death, which requires a Form 706 to be filed, then the IRS has no discretion to grant an extension of time in which a timely portability election can be made. In sum, timely filed Form 706 estate tax returns should be strongly considered at this time and should be discussed with survivors of a decedent’s estate.