Relief for Missed Portability Elections
In this podcast, Bob Keebler covers Revenue Procedure 2014-18, which provides a simplified method for certain taxpayers to obtain an extension of time to make a portability election. Rev. Proc. 2014-18 provides an automatic extension for certain estates of decedents dying in 2011, 2012 and 2013 to elect portability. The extension applies to estates that would otherwise not have had a filing requirement, and allows the estates to file a return to elect portability until December 31. It includes the estates of same-sex decedents who were not eligible to elect portability until after the Windsor decision. Access more resources in the Planning After ATRA and NIIT Toolkit, including more podcasts, new charts by Bob Keebler as well as webcast recordings and Forefield Advisor alerts/videos, and the complete four-volume set of The CPA’s Guide to Financial & Estate Planning, recently updated for ATRA and NIIT, and much more.
ROBERT S. KEEBLER, CPA: On behalf of the AICPA, this is Bob Keebler, and welcome to "Relief for Missed Portability Elections: Rev. Proc. 2014-18."
Rev. Proc. 2014-18 was issued in late January 2014, and its stated goal was to provide a simplified method for certain taxpayers to obtain an extension of time to make the portability election. Of course, the portability election is made by filing the estate tax return.
So under the Treasury regulations and under the code itself, you are required to file an estate tax return to obtain portability. The problem is, not everyone understood this and not everyone recognized that to obtain portability, you actually had to physically file the return. In fact, the majority of estate tax returns that will be filed in the next five to ten years will be to obtain portability. So this is a very important issue for the CPA profession.
Now, Revenue Proc. 2014-18 also covers the Windsor case. And after Windsor, Revenue Ruling 2013-17 was issued. You'll recall in Windsor, the Supreme Court found that the Defense of Marriage Act was unconstitutional. In Revenue Ruling 2013-17, the IRS determined that it would construe the definition of the term spouse, husband, wife to include married same-sex couples.
Now, this means that for a couple where one of the -- a married same-sex couple, someone died in 2011. In all likelihood, they did not file a return to claim portability because of DOMA. Basically, what's happening here is under this ruling, you will be allowed to go back and file those returns to obtain portability.
Now, Rev. Proc. 2014-18 broadly applies only if the estate the estate of a decedent has a surviving spouse, died after December 31st, 2010, and on or before December 31st, 2013, and was a citizen or resident of the United States at the time of their death, and -- this is the important one -- the taxpayer was not required to file an estate tax return. That means you are below the basic exclusion amount.
So, gentleman dies. He's -- He's worth $4 million. The estate tax exemption was $5,120,000 in 2011. He was not required to file a return. Under Revenue Procedure 2014-18, he can get -- his estate can get back in the game and file a return, okay? So his estate can get back in the game and file a return. Very important.
Now, let's say his estate was $7 million, and he left everything to his wife. Can they get back in the game? The answer is no, because they were required to file a return. Now, you might still try to get a Ruling 9100-3 relief. But it's -- I'm not sure you would get that. You would still try.
Now, point 3, the taxpayer did not file an estate tax return within the time required to elect portability, which is nine months. But you are allowed to extend the return to 15, and you can still file for portability. So basically, that's where we are.
Now, on the requirements of Section 4, procedurally, first of all, the 706 must be filed on or before December 31, 2014. So if it's not a timely 706, it must be filed before December 31, 2014. That's fairly straightforward. Here's the thing. On the top of the return, you must write, "Filed pursuant to Rev. Proc. 2008 -- 14-18," to elect portability under Section 2010(c)(5)(A). So that's going to be just written, typed across the top of the return. Very important for us to do that. And then basically what happens is now your portability will be restored.
Now, there are questions here. What happens if the IRS audits and finds the first estate to be over the threshold? That could be a problem.
Okay, now, Revenue Proc. 2014-18 also provides procedures for a claim for a credit or refund. Under the Revenue Proc., a claim for a credit or refund of an overpayment of tax must be made within three years from the date of filing the return, or within two years for the payment of the tax, whichever period expires later, okay? So this is a standard rule for a refund.
Now, let's go through some examples that come directly out of the ruling. S. dies on January 1, 2011, survived by his or her spouse. S1's gross estate consists of bank accounts held jointly with S2, with rights of survivorship in the amount of $2 million. We are well below the threshold. S1 made no taxable gifts during life. S1's executor is not required to file an estate tax return, and does not file such a return.
S2 dies on January 14, 2011. S2's taxable estate is 8 million, and made no taxable gifts during life. S2's executor files a Form 706 on behalf of S2's estate in a timely manner, and includes payment of estate tax on the $3 million in excess of S2's applicable exemption amount.
Now, this could be what happened with a same-sex couple because of DOMA, or it could be just a traditionally married couple that did not -- whose representatives did not understand that portability was available.
Now, pursuant to this revenue procedure, page 9, S1's executor files a Form 706 on behalf of S1's estate on November 1, 2014, reporting a DSUE amount of $5 million. In 2015, the Service determines that S1's estate has met the requirements for a grant of relief under this revenue procedure and is deemed to have made a valid portability election. They accept S1's returns with no changes, and they issue an estate tax closing letter. In this instance, what's going to happen is you now get to use that DSUE. That will carry over to the -- to the second spouse.
To recover the estate tax paid, S2's executor must file a claim for refund -- this is where we have to be very careful -- by October 14, 2014, even though a Form 706 to elect portability has not been filed on behalf of S1's estate at that time. To file such a claim in anticipation of filing the Form 706, S1's executor will be considered a protective claim for the refund of tax. If you get into this situation, be very careful you have perfected that -- that claim. Follow these instructions very, very closely.
Now, the bigger question is, should you file for portability? Going forward, what we need to understand is that there will be more estate tax returns done for portability than to actually report tax or because you're over the 5 million. And what I've done -- I was thinking about this, and I think there are really three zones -- kind of the safe zone at the bottom of the screen on page 11, where we don't have to worry about portability because we're below the threshold. And the portability-planning zone is when you'd better be electing portability, because the two estates together without portability would be subject to estate tax.
And then finally, the estate planning zone, where even portability will not help to eliminate -- It will eliminate most of the estate tax, or, say, 2 million of the estate tax, but it's not going to eliminate all the estate tax. Then you're going to go back to the traditional estate planning techniques we've used for the last 30 years.
Now, the portability zone is especially important when you have large IRAs, because you're going to want to roll over those IRAs, perhaps, rather than use them to fund a bypass trust.
So we've covered a lot of ground today. Revenue Procedure 2014-18 is very important. It gives you a get-out-of-jail card free. If you happen to have clients that have private letter ruling requests or 9100 relief requests in process, you are going to want to look at the procedures about how to pull those rulings. You may be able to get your refund back. Now, you have to be very timely in doing that, okay? You have to be very timely in doing that, so read those procedures.
So on behalf of the AICPA, thank you for joining us today. This has been Bob Keebler, and please visit the PFP and Tax Sections' websites for more information on portability and other developing tax issues. Thank you for joining us today.