The fix, described in IRS Revenue Procedure 2017-34, will help families with moderately large estates that failed to do a good job of keeping up with estate planning rules and paperwork.
An individual can now leave an estate with a value of up to $5.49 million without paying estate taxes. A couple can share a $10.98 million exemption.
Tax law puts imposes a little-noticed requirement on a couple that wants to use the full $10.98 million exemption.
The requirement involves the $5.49 million estate tax exemption tied to the first spouse to die. The couple may have to use part of the $5.49 million exemption value to shield the estate of that first spouse to die from estate taxes.
The leftover exemption value does not pass on to the second spouse automatically. To pass the unused value on to the surviving spouse, the executor of the estate is supposed to “elect portability,” on IRS Form 706, within nine months of the death of the first spouse.
Form 706 is the U.S. Estate (and Generation-Skipping Transfer) Tax Return.
If, for example, John Doe left an estate with a value of $2 million, his widow, Jane Doe, could take over $3.49 million in unused federal estate tax exemption value. Adding John Doe’s $3.49 million in unused estate tax exemption value to Jane Doe’s own $5.49 million individual exemption would give Jane Doe the ability to shield $8.98 million in estate value from federal estate taxes.
The IRS adopted the current rules in 2010. Since then, many families have learned about the need to elect portability while they were dealing with the estate, long after the nine-month portability election filing deadline had passed.
The IRS has already created one temporary portability election error fix program. That fix program expired at the end of 2014.
Since then, the IRS has been handling families’ portability election problems by considering requests for private letter rulings. Getting a private letter ruling is a complicated, expensive process.
“Further, the considerable number of ruling requests received has placed a significant burden on the [IRS],” officials write in the notice explaining the new procedure.
Instead of asking for a private letter ruling, a family that uses the temporary fix will simply file a Form 706 for the estate of the first spouse to die, and mark on the top of the return that the return is “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER SECTION 2010(c)(5)(A).”
The Form 706 fix is available if the first spouse died after Dec. 31, 2010, and was a U.S. citizen, and the estate did not appear to be big enough to owe any estate taxes.
The Form 706 fix will be available until Jan. 2, 2018, or until two years after the death of the first spouse, whichever comes later.
The relief will be null and void if it turns out that the executor for first spouse to die really should have filed an estate tax return for that spouse.
The IRS lists Juli Ro Kim of the IRS Office of Associate Chief Counsel (Passthroughs and Special Industries) as the principal author of the revenue procedure.
— Read Estate Tax Portability: Weighing the Drawbacks on ThinkAdvisor.