The IRS has recently decided to allow a generous extension of time for surviving spouses to obtain the benefit of the unused estate tax exemption of their deceased spouse. This could mean enormous estate tax savings for surviving spouses who did not make appropriate estate tax filings in time.
The Unused Exclusion Amount
As discussed elsewhere in this blog, the Federal estate tax allows an individual to give away up to $5M without incurring an estate tax. That amount is adjusted annually for inflation, and for 2018 an individual will be able to give away $5.6M without incurring an estate tax.
As between spouses, this exclusion amount is “portable”, meaning that an unused exemption amount can be transferred to a surviving spouse, so that a married couple, in 2018, can give away $11.2M without incurring an estate tax. The deceased spouse’s unused exemption amount is referred to in tax circles as the “DSUE.”
However, in order to pass the DSUE to the surviving spouse, the deceased spouse’s personal representative (i.e. executor) must file a Federal estate tax return to "elect" to transfer the DSUE to the surviving spouse within nine months of death. According to the letter of the Code, if this does not occur, then the DSUE will vanish.
Suppose Husband dies in 2018 with a $2M estate, survived by Wife, who has amassed a fortune of $7M. Husband’s Will leaves everything to Wife. Because spouses may leave an unlimited amount to one another without taxation, Husband has not used any of his $5.6M exemption amount. Unfortunately, the Personal Representative of Husband’s estate does not prepare a Federal estate tax return and, thus, cannot transfer Husband’s DSUE (a credit of $5.6M) to Wife. Wife then dies leaving an estate of $9M to her children. Because Wife only has her own $5.6M exemption, an estate tax of 40% will be due on the $3.4M over that exemption amount (resulting in a tax of about $1.36M).
Had Husband’s Personal Representative elected to transfer Husband’s $5.6M DSUE to Wife, then, upon Wife’s death, her $9M would have gone to her children with no estate tax due.
The IRS's Amnesty Program
While the Internal Revenue Code requires the portability election within 9 months of death, it seems many taxpayers have been missing this deadline and requesting relief from the IRS. Instead of dealing with these cases piecemeal, the IRS has announced, in Revenue Procedure 2017-34, that, as of June 9, 2017, it will honor portability elections until the later of January 2, 2018 or 24 months from the date of death. This apparently means that portability can now be elected for spouses that have been deceased for years, notwithstanding the 9-month rule.
Any surviving spouse planning on making substantial gifts should know the status of their deceased spouse’s DSUE and take advantage of this amnesty program immediately. The Federal estate tax savings can be substantial.