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Many individuals, especially those of a high net worth, are familiar with the estate tax exemption (hereinafter the applicable exclusion amount). Simply put, the applicable exclusion amount is the monetary amount that an individual can transfer during his or her lifetime or upon death, without triggering an estate or gift tax. The current applicable exclusion amount for 2017 is $5,490,000 per person.

The concept of portability is much lesser known since it only became permanent in 2012 and applicable for decedents dying after December 31, 2010. Portability is the process by which the IRS now allows married couples to combine their applicable exclusion amounts. Essentially, a surviving spouse has access to his or her own applicable exclusion amount, plus any unused exclusion remaining from the first spouse’s death.

An Example of Tax Portability

This effect of portability can be best illustrated by the below example. Please note the following assumptions:
  • Spouse 1 (S1) Net Worth: $100,000; Date of Death: January 1, 2014
  • Spouse 2 (S2) Net Worth: $10,000,000; Date of Death August 1, 2017
  • Spousal Combined Net Worth: $10,100,000
Prior to the existence of portability, the death of S1 would not result in an estate tax since it is below the applicable exclusion amount for 2014 ($5,340,000). However, upon the death of S2, the estate tax would hit hard. Of S2’s $10,000,000 net worth, $4,510,000 would be subject to the 40% estate tax (S2’s $10,000,000 net worth less the $5,490,000 Applicable Exclusion Amount) resulting in a tax of $1,804,000. This amount effectively wipes away almost 20% of S2’s net worth.

Application of Tax Portability

The death of S1 would still not incur an estate tax for the same reason as above. However, upon S2’s death, the result would be different. Portability would allow S2 to utilize his or her applicable exclusion amount of $5,490,000 plus the amount of S1’s applicable exclusion amount that S1 did not need. S1’s unused exclusion would be $5,240,000 ($5,340,000 exclusion for 2014, less $100,000 of S1’s total assets). This process results in Spouse 2 having access to $10,730,000 of applicable exclusion, while only having a $10,000,000 estate, effectively removing any estate tax due on S2’s death.
Although portability as a whole can be explained easily, the IRS provides a twist. Specifically, in order for portability to be utilized, an estate tax return must be filed upon the death of the first spouse. Thus, in the above example, in order for S2 to have access to S1’s unused exclusion amount, S1’s estate must have a timely filed estate tax return, even though S1 only had a net worth of $100,000.
Prior to June 2017, absent an estate tax return for S1, the prospect of portability was either lost completely for S2, or extremely difficult for S2 to obtain. Moreover, a late portability election could only be granted through a Private Letter Ruling Request (PLR) to the IRS, which carries a hefty filing fee (currently $10,000); significant legal fees to draft the request; and is very time-consuming. The IRS may then grant the PLR request (if good reason exists) and permit S1’s estate representative to go back and file an estate tax return on S1’s behalf in order to utilize S1’s unused exclusion for S2’s benefit.
Effective as of June of this year, the IRS has provided taxpayers who fall under this category an expedited form of relief through the temporary removal of the PLR requirement. This relief was granted via Rev Proc. 2017-34. This Revenue Procedure permits S1’s representative to automatically go back and file an estate tax return on S1’s behalf in order for S2 to utilize the unused portion of the exclusion. The only requirement for the filing of the late estate tax return is that it states the following at the top:

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Although Rev Proc. 2017-34 makes portability more accessible for a surviving spouse, it will not be available after January 2, 2018, or after the second anniversary of the first spouse’s death.
If you are an individual with a taxable estate and have recently suffered the loss of a spouse, portability may be something that you overlooked. Our experienced estate/tax planning attorneys can help. Contact Morris Law Group to schedule your initial consultation.
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