Partner Yvonne Cort, who focuses on Tax and Tax Controversy, authored the article below for the October 2018 issue of the National Conference of CPA Practitioners Nassau/Suffolk Chapter Newsletter.
MLMIC: Initial appointment of policy administrator does not necessarily extend to distribution of the cash payments
Partner Joseph Milano issued this important memorandum to his clients on September 26, 2018.
Associate Jodi Warren, whose practice focuses on advising religious and nonprofit organizations, was profiled in this week’s New York Real Estate Journal: 2018 Women in Real Estate issue. The profile highlights a recent deal Ms. Warren structured that helped a financially troubled church generated income and continue its mission for the long term.
You may read the profile here
Associate Jodi Warren, whose practice focuses on advising religious and nonprofit organizations, was published in Thomson Reuters Checkpoint, Real Estate Taxation Journal, 2nd Quarter 2018. This article was also published in the Taxation of Exempts Journal, July/August 2018.
You may read the article here.
Tax Partners Yvonne Cort and Robert Barnett contributed to the June/July edition of “The Trusted Professional”, newspaper of the New York Society of Certified Public Accountants. Ms. Cort was quoted in the article “Bipartisan bill would overhaul IRS for first time since 1998”. Mr. Barnett was featured in the CPA Roundtable, where he addressed the question “How did preparing for the Tax Cuts and Jobs Act affect this year’s tax season?”
The federal estate tax laws changed significantly in 2017. The first such change occurred on June 9, 2017, when the Internal Revenue Service (IRS) issued Revenue Procedure 2017-34. This Revenue Procedure provides for an extension of time to elect portability.
As described below, portability allows the surviving spouse to use the first deceased spouse’s unused federal estate tax exemption. More recently, on December 22, 2017, the President signed the Tax Cuts and Jobs Act (“TCJA”) into law. The TCJA raises the federal gift and estate tax exemption, as well as the generation-skipping transfer tax exemption, beginning on January 1, 2018. It is important for practitioners to be aware of these changes and to advise clients accordingly.
The Increased Exemption
The Internal Revenue Code (IRC) sets the federal estate and gift tax exemption at $5,000,000, adjusted annually for inflation.1 Before Congress passed the TCJA, the federal estate and gift tax exemption was scheduled to increase to $5,600,000 on January 1, 2018. However, for estates of decedents dying or gifts made after December 31, 2017 and before January 1, 2026, the TCJA doubles the exemption amount to
$10,000,000, indexed annually for inflation.2 As such, the federal estate and gift tax exemption in effect for the calendar year beginning January 1, 2018 is $11,200,000. The increased exemption (adjusted annually for inflation) will remain in effect until the applicable provisions of the TCJA expire on December 31, 2025.
An Increased Benefit
The federal gift and estate tax exemption applies on an individual basis for citizens and residents of the United States.3 Portability provides a special benefit for married couples who are United States citizens. The executor of the first deceased spouse’s estate can transfer any unused federal estate and gift tax exemption (otherwise known as the deceased spousal unused exclusion amount, or DSUE) to the surviving spouse by making a portability election. Beginning January 1, 2018, it will be possible for married couples to transfer up to $22,400,000 without paying federal estate or gift taxes.
Portability is available for decedents dying after December 31, 2010. If portability is desired, the executor must make a portability election by timely filing a complete and properly prepared estate tax return (Form 706).4 Form 706 is complex, and the executor should seek competent legal and accounting advice to prepare the return, which may be costly. However, if the executor is filing solely to elect portability, a simplified filing is permitted, which may alleviate the cost and burden to the executor and the estate.5
In some cases, a court-appointed executor or administrator may not be necessary to administer a decedent’s estate. For example, if a married couple has title to all of their assets by joint ownership, probate will not be necessary for the first deceased spouse’s estate. In such a case, an executor would not be appointed by a court.
Fortunately, to elect portability, a court-appointed executor is not required. IRC § 2203 provides that for estate tax purposes, the term “executor” includes “any person in actual or constructive possession of any property of the decedent.”6 Therefore, a surviving spouse or other individuals who receives property from the deceased spouse’s estate is considered an executor, and may file an estate tax return without letters of appointment issued by a court.
The portability election must be made on a timely filed Form 706. To be considered timely, Form 706 must be filed within the nine-month anniversary of the decedent’s death, or the fifteen-month anniversary if the executor files an extension of time to file Form 706.7
If a portability election was made, the statute of limitations remains open on the first spouse’s estate. However, this tolling is limited, as the first deceased spouse’s Form 706 may be re-examined solely to review the calculation of DSUE.8 The IRS has authority to re-examine the DSUE even if the IRS has issued an estate tax closing letter. However, because the re-examination is limited, executors should not be deterred from filing Form 706 to elect portability.
Many executors have failed to timely elect portability, resulting in the loss of increased federal gift and estate tax exemption. The IRS received numerous private letter ruling requests for an extension of time to elect portability. In some requests, the executor was unaware of the need to file Form 706 to make the election. In other requests, the executor of the surviving spouse’s estate discovered that a portability election was never made.9 The IRS recognized a need for continued relief and issued Revenue Procedure 2017- 34 to provide guidance.
Revenue Procedure 2017-34 provides a simplified method to obtain an extension of time to file Form 706 and elect portability. Relief is available for estates of decedents who died after Decem- ber 31, 2010 and were survived by a spouse. The decedent must have been either a citizen or resident of the United States on the date of his or her death.
Relief is only available for estates not required to file Form 706. Form 706 is not required if the value of the gross estate, plus adjusted taxable gifts, did not exceed the federal estate tax exemption.10 However, due to the present exemption levels, portability and relief under Revenue Procedure 2017-34 should be available to many estates. It is important to look at asset valuation and titling. For example, even a large estate where assets are held jointly between spouses may take advantage of Revenue Procedure 2017- 34, as only one-half of the value of such assets are included in the first spouse’s gross estate.11
Executors are also permitted to opt out of portability on Form 706. If an executor filed a timely Form 706 and elected out of portability, the extension under the Revenue Procedure is not available. 12
Filing Form 706
If an estate is eligible for relief, the executor must file a complete and properly prepared Form 706 on or before the later of January 2, 2018 or the second anniversary of the decedent’s death. Additionally, the executor must state the follow- ing on the top of page one of Form 706: “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).”
Now that January 2, 2018 has passed, there are only two ways for an executor to take advantage of Revenue Procedure 2017-34. If filing will occur on or within the two-year anniversary of the decedent’s death, the Revenue Procedure must be used. 13 If filing will occur after such two-year anniversary, the executor must request a private letter ruling. 14 Again, relief is only available if Form 706 was not required to be filed based upon the size of the gross estate.
New York State Estate Tax
In addition to the federal estate tax, there is a New York State estate tax applicable to New York resident decedents and non-residents having property located in New York State. The current New York estate tax exemption is $5,250,000.15 New York does not follow the federal rules and does not allow portability of any New York estate tax exemption.
On January 1, 2019, the New York estate tax exemption is scheduled to match the federal amount.16 It is unclear at this time whether New York will amend its estate tax law to the new increased $10,000,000 federal estate tax exemption, as amended by the TCJA. The estate tax portion of the New York Tax Law refers to the IRC with all amendments enacted on or before January 1, 2014.17 As such, beginning January 1, 2019, the New York estate tax exemption will likely track the prior federal exemption at $5,000,000, adjusted for inflation.
Portability is a valuable tool for married couples to take advantage of the maximum federal estate and gift tax exemption. The increased exemptions provide meaningful relief for many clients. Executors of smaller estates must also fully consider the benefits of making a timely portability election. Similarly, attorneys representing executors must fully communicate the benefits of portability to their clients. Attorneys should also review estate plans and trusts in light of the TCJA.
Gregory L. Matalon is a partner in the Estates and Trusts department of Capell Barnett Matalon & Schoenfeld LLP, with offices in Jericho and Manhattan. Erik M. Olson is an associate in the Estates and Trusts department of Capell Barnett Matalon & Schoenfeld LLP.
1 I.R.C. § 2010(c).
2 Tax Cuts and Jobs Act § 11061(a). 3 I.R.C. § 2001(a); I.R.C. §2010(a).
4 I.R.C. § 2010(c)(5).
5 Treas. Reg. § 2010-2(a)(7)(ii). 6 I.R.C. § 2203.
7 Treas. Reg. § 20.6075-1.
8 Estate of Sower v. Comm’r, 149 T.C. 11 (2017). 9 Revenue Procedure 2017-34 § 2.02(4).
10 Revenue Procedure 2017-34 § 3.01.
11 I.R.C. § 2040(b).
- Revenue Procedure 2017-34 § 3.02.
- Revenue Procedure 2017-34 § 7.02.
- Revenue Procedure 2017-34 § 2.02(6).
- New York Technical Memorandum TSB-M-14(6)M. 16 Id.
This article originally appeared in WealthCounsel Quarterly, January 15, 2018
written by Partner Robert S. Barnett, CPA, J.D. and Associate Erik Olson, J.D.
This issue of WealthCounsel Quarterly was sent to the printer in early November 2017. The Tax Cuts And Jobs Act was signed into law after this article was finalized. The Act doubles the exclusion amount beginning January 1, 2018 and ending December 31, 2025.
2017 has been fraught with legislative uncertainty, and pending tax legislation makes planning more difficult. However, there is one aspect of the estate tax law which has actually become more certain, at least for now. On June 9, 2017, the IRS released Revenue Procedure 201734, providing a new simplified method for the executor of an estate to obtain an extension of time to file a federal estate tax return (Form 706) to make a portability election, if the estate was not otherwise required to file Form 706. This article briefly discusses portability and describes the mechanics and computations involved in determining whether a late portability election is available.
Portability: An Overview
The federal lifetime estate and gift tax exclusion amount is the largest amount that an individual can pass free of estate tax at death. The exclusion amount is adjusted annually for inflation. For decedents dying in 2017, the exclusion amount is $5.49 million.
Most estates are below the exclusion amount, and the benefit of any unused exclusion may be lost. However, the decedent’s surviving spouse may use the decedent’s deceased spousal unused exclusion (DSUE) by making a portability election. If a portability election is made for the estate of the deceased spouse, the surviving spouse may use the deceased spouse’s DSUE in addition to the surviving spouse’s own exclusion amount. This results in the surviving spouse having an applicable exclusion amount that is the sum of his or her exclusion (which will continue to adjust for inflation under current law) plus the amount of DSUE he or she received from the deceased spouse (which is fixed at the time the time of the first spouse’s death).
Portability was originally afforded by an amendment to Internal Revenue Code (“Code”) § 2010(c). Portability is generally available for estates of decedents dying after December 31, 2010. Estates of decedents dying on or before December 31, 2010, cannot make a portability election.
Why is portability so important? The answer is clear for wealthy clients: Estate tax rates are high (the maximum federal estate tax rate is currently 40 percent), and most people seek to minimize estate taxes in order to benefit their desired beneficiaries. But for clients of more modest means, portability may be a less attractive (and more confusing) option. As described below, making a portability election requires preparing and filing a complete and accurate estate tax return, even if a return is not otherwise required to be filed, typically because the estate is below the filing threshold. Why would a surviving spouse want to pay a professional fee to prepare and file an estate tax return if there is no clear benefit to doing so? Why would a professional discuss the option of portability with clients who may never reap the benefits?
The answer to both of these questions is one of life’s few guarantees: Uncertainty. No one can guarantee a client’s future financial position, and the estate tax, itself, has an uncertain future. It is important to discuss all options with clients. The client is always the person in the best position to determine if it is worth their time and money to make a portability election.
Making the Portability Election
To elect portability, the executor of the deceased spouse’s estate must make the portability election on a timely filed federal estate tax return (Form 706). This raises two important questions: (1) Who may file Form 706 for a decedent’s estate if no executor (or other personal representative) is appointed by a court, and (2) What is considered a timely filed Form 706?
An executor is typically appointed by a court of law after initiating a probate proceeding. However, careful estate planning may eliminate the need to probate a decedent’s will and many people utilize testamentary substitutes, such as beneficiary designations, joint accounts, or fully funded revocable trusts. If there is no court appointed fiduciary, can Form 706 still be filed for an estate?
Code § 2203 states “[t]he term ‘executor’ … means the executor or administrator of the decedent, or, if there is no executor or administrator appointed, qualified, and acting within the United States, then any person in actual or constructive possession of any property of the decedent.”
The instructions to Form 706 provide a similar definition of an executor. For example, if no fiduciary is appointed for a decedent’s estate, but the decedent’s assets have valid beneficiary designations naming the decedent’s surviving spouse, or if the decedent owned all assets in joint tenancy with the surviving spouse, the surviving spouse will be in actual or constructive possession of the decedent’s property. The surviving spouse is therefore considered an “executor” for purposes of preparing and filing Form 706, and may make a portability election on a timely filed Form 706 for the deceased spouse’s estate.
What is a timely filed Form 706? To be considered timely filed, Form 706 must be filed by the ninemonth anniversary of the decedent’s death (or fifteenmonth anniversary, if the sixmonth extension request is filed and granted).
Is relief available for estates that do not timely file an estate tax return? The answer depends on whether the estate is “required” to file a return, as discussed below. An executor of an estate that is not required to file Form 706 may make a private letter ruling request for an extension of time to file Form 706 in order to make a portability election. However, the IRS has provided in Revenue Procedure 201734 for a new automatic extension of time to file Form 706 in order to make the election, rather than requiring the private letter ruling process for many taxpayers.
Revenue Procedure 201734: The Automatic Extension of Time to Make a Portability Election
Revenue Procedure 201734 provides for an automatic extension of time to file Form 706 to make the portability election. The automatic extension allows executors of certain estates to make a late portability election by timely filing a complete and accurate estate tax return by the later of (i) January 2, 2018; or (ii) the second anniversary of the decedent’s death. During such time period, Revenue Procedure 201734 is the exclusive avenue for relief; an executor may only make a private letter ruling request after the time to obtain the automatic extension under Revenue Procedure 201734 has expired. If the executor had already made a private letter ruling request and the request was pending as of June 9, 2017, the IRS will close the request and refund the fee to the executor, and the executor must seek relief pursuant to the Revenue Procedure.
Like private letter ruling requests, the automatic extension only applies to estates that are not otherwise required to file Form 706 (discussed below). Under the new Revenue Procedure, estates of decedents dying after January 2, 2016, can file Form 706 to make a portability election within two years of the decedent’s death. However, for older estates, the January 2, 2018, deadline is an extremely important opportunity, and executors of estates which are eligible to receive the automatic extension should strongly consider filing Form 706 to make a late portability election. The automatic extension is a potentially simpler, more certain, and less costly means of relief than making a private letter ruling request.
Relief is available under Revenue Procedure 201734 for estates of decedents who (i) are survived by a spouse, (ii) died after December 31, 2010, and (iii) were either United States citizens or residents at the time of death. However, relief is not available if an estate tax return was already timely filed (and the election was not made), and no relief is available for estates that are otherwise required to file Form 706. If the estate qualifies for the automatic extension, the executor may file a complete and properly prepared Form 706 before the end of the extension period, and must state the following at the top of Page 1 of Form 706—“FILED PURSUANT TO REV. PROC. 201734 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).”
It is important to determine whether an estate must file Form 706 to take advantage of Revenue Procedure 201734 or, if relief under the Revenue Procedure is unavailable, whether the estate can make a private letter ruling request (discussed later in this article).
Which estates are “required” to file Form 706? An estate must file if the decedent’s gross estate, plus the value of the decedent’s adjusted taxable gifts, exceeds the applicable federal exclusion amount (Code § 6018). A decedent’s gross estate is computed by totaling the gross value of all of a decedent’s property as of the decedent’s date of death. The executor calculates the gross estate on Form 706 by combining the totals of all of the decedent’s assets, as reported on Schedules A through I of Form 706.
In computing the value of the decedent’s gross estate, the executor should note that the gross estate includes only onehalf of the value of all assets reported on Schedule E1 of Form 706. Schedule E1 lists all of the decedent’s qualified joint interests. A qualified joint interest is held by the decedent and the surviving spouse either (i) as tenants by the entirety or (ii) as joint tenants with right of survivorship if the decedent and surviving spouse are the only joint tenants of the asset. However, the surviving spouse must be a United States citizen for such interests to be qualified joint interests. All interests which are held jointly between a decedent and a noncitizen spouse are reported on Schedule E2, and the decedent’s gross estate includes one hundred percent of the value of such interests (unless the executor provides proof of the surviving joint owner’s contribution to such joint interests).
The persons and facts discussed in this example are fictitious and are intended to illustrate the benefits of Revenue Procedure 201734, as well as the computation necessary to determine if relief is available either under Revenue Procedure 201734 or by private letter ruling request.
Harry and Wilma are United States citizens, and have been happily married for many years. Unfortunately, Wilma passed away on January 1, 2013. At the time of her death, Wilma owned $600,000 of assets in her name alone, which she left to Harry, and also owned $5.4 million of assets in joint tenancy with Harry and no other joint tenants. Wilma made no taxable gifts during her lifetime. In 2013, the basic exclusion amount was $5.25 million, all of which was available to Wilma’s estate, but none of which was needed because her entire estate passed to Harry taxfree, as a result of the unlimited marital deduction.
Ever the dutiful husband, Harry promptly probated Wilma’s will, and the court appointed Harry as executor of Wilma’s estate. However, Harry had always been a doityourselfer, and did not seek the advice of a professional to help him administer Wilma’s estate. Harry was not aware of the benefits of portability, and did not file Form 706 for Wilma’s estate.
On May 1, 2017, Harry passed away, leaving all of his assets to his loving children, Mark and Sally, who are also the nominated coexecutors in Harry’s will. At the time of his death, Harry only owned the (i) $600,000 of assets he received from Wilma under her will, and (ii) $5.4 million of assets that he had owned in joint tenancy with Wilma, which were then held in Harry’s name alone after Wilma’s death. For the sake of simplicity, we are not assuming any fluctuation in asset values.
Mark and Sally sought the help of qualified professionals to probate Harry’s will, and the court issued a decree appointing Mark and Sally as coexecutors of Harry’s estate. However, when the time came to file Harry’s estate tax return, Mark and Sally realized that Harry died with a gross estate of $6 million and a federal basic exclusion amount of only $5.49 million. Because Harry had not filed Form 706 for Wilma’s estate within the time required by law, no portability election was made. Without portability (and assuming no available deductions), Harry’s estate would be subject to $159,500 in federal estate tax.
Had Harry made the portability election for Wilma’s estate, Wilma’s basic exclusion amount of $5.25 million would have passed to Harry, giving him an applicable exclusion amount of $10.74 million (Harry’s own $5.49 million + Wilma’s $5.25 million). This combined exclusion amount would have more than sheltered Harry’s $6 million of assets from estate tax, and Mark and Sally would have received an additional $159,500 instead of paying that amount in tax.
Can Mark and Sally make a late portability election by filing Form 706 for Wilma’s estate without being appointed as successor coexecutors of her estate? Mark and Sally will each receive Wilma’s property because they are the beneficiaries of Harry’s estate, and Harry had received Wilma’s property upon her death. As such, Mark and Sally are in actual or constructive possession of Wilma’s property, and are therefore considered executors for purposes of filing Form 706 for Wilma’s estate.
Can Mark and Sally make a late portability election for Wilma’s estate? Relief is available only to estates which were not required to file Form 706. If the value of Wilma’s gross estate did not exceed the basic exclusion amount in effect upon her death, then Form 706 was not required to be filed for Wilma’s estate, and relief may be available.
The federal exclusion amount was $5.25 million when Wilma died on January 1, 2013. Wilma died with $600,000 of property in her name alone, and held assets in joint title with Harry having a value of $5.4 million. However, as Wilma and Harry were the only joint tenants of the joint assets, only onehalf of the value of those assets is included in Wilma’s gross estate. As such, the value of Wilma’s gross estate was $3.3 million ($600,000 + $2.7 million (onehalf of the joint assets)). Since this amount was below the 2013 federal exclusion amount, Wilma’s estate was not required to file Form 706.
Just as Mark and Sally were contemplating making a private letter ruling request for an extension of time to file for portability for Wilma’s estate, the IRS released Revenue Procedure 2017
- Mark and Sally realized that they could take advantage of the Revenue Procedure because: (i) Wilma was survived by a spouse; (ii) she died after December 31, 2010; (iii) she was a United States citizen at the time of her death; (iv) an estate tax return was not already timely filed for her estate; and (v) her estate was not required to file Form 706.
Mark and Sally prepared a complete and accurate Form 706 for Wilma’s estate (including the required language on the top of the first page of the return), and filed before the January 2, 2018, deadline, thereby making a valid portability election. Because all of Wilma’s assets passed to Harry and qualified for the marital deduction, Harry’s estate received the full $5.25 million of DSUE from Wilma’s estate. Mark and Sally were then able to add Wilma’s DSUE to Harry’s exclusion amount on Harry’s Form 706, resulting in no federal estate tax due for Harry’s estate.
IRS May Grant a Late Portability Election by Private Letter Ruling
If an executor wants to make a late portability election after the later of January 2, 2018, or two years after the decedent’s death, the executor cannot take advantage of the automatic extension provided by Revenue Procedure 201734. However, an extension of time to elect portability may be allowed if the executor requests a private letter ruling and the IRS grants an extension. Treasury Regulations § 30191001(c) provides that the IRS may grant a reasonable extension of time for regulatory elections under § 301.91002 and § 301.91003, commonly called “9100 relief.”
Like the automatic extension provided by Revenue Procedure 201734, 9100 relief is not available for estates that are required to file a return. However, unlike the automatic extension of Revenue Procedure 201734, 9100 relief is not guaranteed. The executor of the estate must make a private letter ruling request to the IRS (at a cost to the estate), and the IRS will determine whether to afford relief based upon the facts and circumstances of each case. While private letter rulings provide insight into the IRS’s view of requests for relief, each private letter ruling is unique to the facts and circumstances of a particular case and cannot be relied upon or cited as precedent.
Treasury Regulations § 301.91003 provides that relief will be granted if the executor (i) provides evidence that the taxpayer acted reasonably and in good faith in failing to make a timely portability election, and (ii) that granting relief will not prejudice the interests of the government. Acting reasonably and in good faith typically requires that the executor reasonably relied upon the advice of a competent professional. An executor’s reliance would not be considered reasonable if the executor knew or should have known that the professional either was not competent to provide advice regarding the portability election, or that the professional was not aware of all relevant facts to provide advice.
The Bottom Line
Executors and professionals should pay careful attention to estate tax filing requirements and deadlines, and should take care to timely file Form 706 if it is required or if portability is desired.
There is one important caveat to both the automatic extension afforded by Revenue Procedure 201734 and relief obtained by private letter ruling requests. If it is later determined that Form 706 was required to be filed, the IRS’s authority to grant an extension of time to file Form 706 to elect portability may be void retroactively. In Estate of Sower v. Comm’r, 149 TC No. 11 (Sept. 11, 2017), the Tax Court found that the IRS has authority under Code § 2010(c)(5)(B) to reexamine the filed Form 706 of the first deceased spouse’s estate to determine the correct DSUE amount, even if the IRS had issued an estate tax closing letter and even if the statute of limitations to examine the first return had expired. Executors should review all asset and taxable gift information and search for undiscovered estate assets to avoid a potential loss of relief.