For Estate Planning, Don’t Overlook Late Portability Elections

As discussed above, for a client who is not otherwise required to file a federal estate tax return because his or her estate does not exceed the federal exemption amount, failure to elect portability is common.  The election could still be valuable, however, in the case of a lower estate tax exemption in future years or if the client’s estate grows substantially in the years between the death of the first spouse and the client.

IRS officials have released a statement reminding estates that have failed to make timely portability elections that extensions may be available if the estate can show that there was good cause for the failure.  If the estate was originally required to file an estate tax return (generally because the value of the estate exceeded the annual exemption amount), no extension for electing portability is available. 

However, many estates that were otherwise not required to file an estate tax return fail to elect portability on time (by filing an estate tax return within nine months following the decedent’s death; an automatic extension to 15 months is available) and those estates may be eligible to request an extension. 

The extension is requested by filing Form 4768, and the IRS advises taxpayers to include on this form an explanation for why they had good cause for failing to meet the deadline (the client will also be required to file Form 706). 

Common “good cause” excuses are that the taxpayer relied on a qualified tax professional’s advice that no portability election was necessary or that, given the taxpayer’s experience and the complexity of the issues, the client was unaware of the need for making the election after exercising reasonable diligence.   Relying on written IRS guidance or discovering the error and requesting relief before the IRS discovers the error also qualify as good cause excuses.

Conclusion

The IRS’ reminder on the potential for late portability elections highlights the advisor’s role in ensuring that the client is aware of the potential value of electing portability—even in situations where the estate of the first-to-die spouse does not exceed the federal estate tax exemption amount—in order to preserve the portability option for the future.

• See previous coverage of the impact of portability elections in Advisor’s Journal.
• For in-depth analysis of the estate tax generally, see Advisor’s Main Library.
• Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.