The federal estate tax exemption amount establishes a maximum limit on the value of assets an individual can pass to non-spouse and non-charitable recipients without incurring federal estate tax liability. Although the federal estate tax exemption amount has changed frequently over the years, one constant has been the rule that the federal estate tax exemption amount is personal to an individual. If a decedent's estate did not use up his or her entire federal estate tax exemption amount, that unused exemption was lost. That rule changed dramatically with the introduction of portability provisions for deaths occurring after December 31, 2010.
Under the portability provisions, if a decedent's estate does not use up his or her entire federal estate tax exemption amount, the unused exemption can be transferred to the surviving spouse. The surviving spouse then has access to their own federal estate tax exemption amount, plus any unused exemption received from their predeceased spouse. By complying with the portability provisions, a married couple now has the opportunity to avoid paying any federal estate taxes if their combined taxable estates do not exceed $10,680,000 (based on 2014 federal estate tax exemption amount of $5,340,000 per taxpayer).
IRS Notice 2011-82 clarified that a Federal 706 Estate Tax Return must be properly prepared and timely filed after the death of the first spouse in order for the surviving spouse to take advantage of the portability provisions. Unless an extension is obtained, a Federal 706 Estate Tax Return must be filed within nine months of the decedent's date of death. Failure to timely file a properly prepared Federal 706 Estate Tax Return results in a loss of the portability provisions. Depending on the size of the estate, failure to file a Federal 706 Estate Tax Return could result in significant negative tax consequences at the time of the surviving spouse's death.
Over the past three years, there were some taxpayers who failed to file a Federal 706 Estate Tax Return and missed the opportunity to take advantage of the portability provisions. The reasons for failing to file the Federal 706 Estate Tax Return are varied. In some cases, the taxpayer may have determined that no filing was necessary because their assets would probably never reach the federal estate tax limits. Other taxpayers may simply have been unaware of the need to file a Federal 706 Estate Tax Return in order to take advantage of the portability provisions.
Same sex couples who were validly married under state law were prohibited from taking advantage of the portability provisions because the federal Defense of Marriage Act (DOMA) refused to recognize their marriage. The Supreme Court's June 2013 ruling in the United States v. Windsor case held that the federal government's refusal to recognize the marital status of same sex individuals who were validly married under state law was unconstitutional. As of June 26, 2013, the ruling in the Windsor case now provides sex spouses couples who are validly married under state law with the opportunity to use the federal estate tax portability provisions. However, the Windsor decision did not specify what would happen in those cases where the nine month deadline for filing a Federal 706 Estate Tax Return had already passed. The IRS recently issued Revenue Procedure 2014-18 which resolves this issue in a way that provides an opportunity for many taxpayers, not just those same sex spouses who were impacted by the Windsor decision.
IRS Revenue Procedure 2014-18, issued on January 27, 2014, grants an extension of the portability provisions to the estates of all decedents who:
- died during calendar year 2011, 2012, or 2013;
- left a surviving spouse; and
- had a gross estate that did not exceed the federal estate tax filing requirements in effect on the date of death ($5,000,000 gross estate for calendar year 2011, $5,120,000 gross estate for calendar year 2011, $5,250,000 gross estate for calendar year 2013).
Estates that meet these criteria have been granted an automatic extension through December 31, 2014, to file a properly completed Federal 706 Estate Tax Return. The purpose for filing such a return would be to transfer any federal estate tax exemption amount not used at death of the first spouse to the surviving spouse under the portability provisions. This is a valuable opportunity that should not be overlooked.
Filing the Federal 706 Estate Tax Return in the first spouse's estate may result in federal estate tax savings at the death of the second spouse, depending on the value of the spouse's respective estates and the federal estate tax rules and regulations in effect at the spouse's respective deaths. If your spouse died during calendar years 2011, 2012, or 2013, and no Federal 706 Estate Tax Return was filed after your spouse's death, you should consult with your legal advisors to determine whether a Federal 706 Estate Tax Return should be prepared and filed prior to the new December 31, 2014, deadline.
To review a complete copy of IRS Revenue Procedure 2014-18, click here.
For any questions regarding portability of the federal estate tax exemption or other estate planning issues, please contact Janice J. Kerkove or another member of our Estate Planning Practice Group.
Categories: Estate Planning Law