Window of opportunityThe IRS has opened a temporary window to apply for retroactive estate tax portability of the unused exemption amount for decedents who died in 2011, 2012, or 2013.  IRS Revenue Procedure 2014-18 issued in late January provides a window for the remainder of 2014 during which a surviving spouse can file an estate tax return for a decedent who died in those years and retroactively qualify for portability. 

The advantage of estate tax portability is that the surviving spouse can claim the deceased spouse’s unused exemption amount (DSUEA).  This greatly reduces the likelihood of future estate tax liability for most couples and provides a financial and tax planning opportunity.  The Form 706 estate tax return must be filed in 2014 to qualify for the retroactive portability window.

For 2011, estates exceeding $5 million were taxed at 35 percent.  In 2012 the estate tax exemption was inflation-adjusted to $5.12 million.  For 2013 and 2014, the exemption amounts are $5.25 million and $5.34 million, respectively.  The tax rate has now increased from 35 percent to 40 percent.  Karen S. Hindson

When unused exemption amount (DSUEA) portability was first enacted in 2010 as part of the first fiscal cliff legislation, it was temporary.   Many missed the deadline for filing for portability, or decided that the expense of filing an estate tax return wasn’t worth it for a temporary law.  The American Taxpayer Relief Act of 2012 made portability permanent, however, and portability is now an important estate planning tool for many families.  Rev Proc 2014-18 allows surviving spouses a second chance to file the Form 706 and claim DSUEA.

Estate tax returns normally must be filed within 9 months of death, with a possibility of a 6-month extension.  A Form 706 must be filed to elect portability, even if there is not an estate tax liability or other reason to file the return.  During the 2014 window, estates can claim an extension for filing an estate tax return beyond the normal filing period for decedents who died in 2011, 2012, or 2013.

The Revenue Procedure allowing a late extension to file only applies to those estates where there was not otherwise a requirement to file an estate tax return (in other words, estates under the estate tax exemption amount).   The decedent must have been married and a U.S. citizen or resident at the time of death.

Who should take advantage of this 2014 window of opportunity?  Any widow or widower whose spouse passed away during 2011, 2012, or 2013, should at least consider filing an estate tax return and claiming DSUEA.  The only reason not to file is if the net worth is so low that the surviving spouse is unconcerned about potential future federal estate tax liability, or believes that the risk of estate tax liability is so low that portability is not worth the expense of filing the estate tax return.

Surviving spouses with assets currently under the estate tax threshold should consider their life expectancy and the possibility of future growth of their assets.

If you, or someone you know, can benefit from the significant planning opportunity presented by Rev Proc 2014-18, do not delay.  Contact your estate planning attorney or CPA now to discuss or take advantage of the 2014 window.

© Karen S. Hindson, Hindson & Melton LLC  February 13, 2014