IRS gives mulligan to elect portability for $5 million estate exclusion

January 28th, 2014 by Joe Kristan
Flickr image courtesy quinn.anya under Creative Commons license

Flickr image courtesy quinn.anya under Creative Commons license

It’s bound to happen.  Dad Taxpayer dies suddenly, leaving behind a car on blocks and a paid-for 12-wide for his widow.  A lawyer friend of the family handles the estate paperwork for the widow for a nominal fee.  Two years later the widow buys a winning lottery ticket, and dies of a heart attack shortly after she learns she won $50 million.

Her surviving children are happy that Dad’s $5 million lifetime estate exemption is “portable,” meaning Mom could use it to reduce the estate tax on her shiny new $50 million estate by $2 million or so.  Except for one thing: lawyer friend didn’t file an estate tax return electing to pass the unused $5 million exemption to the widow ($5,340,000 for 2014, with inflation adjustments).

The permanent estate tax enacted last year allows a surviving spouse to use the lifetime exemption the first spouse doesn’t use, saving the need for sometimes complex estate planning to make sure the first spouse’s estate exclusion doesn’t go to waste.  But that only works if the first spouse files a timely estate tax return electing to pass the unused exemption to the survivor.  

The IRS yesterday gave a limited mulligan to family lawyer with Rev. Proc. 2014-18.  Tax Analysts reports ($link) on how Catherine Hughes,  attorney-adviser, Treasury Office of Tax Legislative Counsel, explains the relief:

     Estates eligible for the simplified method under Rev. Proc. 2014-18 are those for which the decedent is a U.S. citizen or resident, the decedent died after 2010 and before 2014, the decedent is survived by a spouse, the estate was not required to file an estate tax return under section 6018(a) because the estate lacked sufficient assets, and the estate did not file a timely estate tax return.

“Estates of decedents that meet that criteria have an automatic extension of time to file a timely estate tax return until the end of 2014,” Hughes said.

So all sins up until 2014 are forgiven if an estate return is filed this year.  Unfortunately, the requirement to file a return remains for decedents dying in 2014 and later to achieve portability, even if a return wouldn’t be required otherwise.  This is a stupid foot-fault requirement.  The election should be available on the surviving spouse’s Form 706 unless the decedent elects out.  Until then, though, every first spouse estate should consider filing an estate return, just in case the widowed spouse picks the right Powerball.

The TaxProf has more.


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