The Internal Revenue Service recently issued Revenue Procedure 2014-18, providing significant relief for estates that were below the federal estate tax filing threshold and failed to file an estate tax return to elect portability of the decedent’s unused federal estate tax exemption. 

Estates of decedents who died between Jan. 1, 2011, and Dec. 31, 2013, that did not timely file an estate tax return solely for the purpose of electing portability now have an extension until Dec. 31, 2014, to do so.

The concept of portability of a decedent’s unused federal estate tax exemption was introduced with the enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Under current federal law, each person is allowed to gift during life or leave upon death up to $5 million (indexed for inflation), free of estate and gift tax. If someone does not use his entire exemption amount, the Tax Relief Act of 2010
allows that person’s surviving spouse to use the unused exemption amount (DSUEA). This concept is called portability. 

A surviving spouse can use the DSUEA only if the estate of the first-to-die spouse makes a portability election by timely filing a U.S. Estate (and Generation-Skipping Transfer) Tax Return (Form 706). In order to do so, the estate is
required to file Form 706 to elect portability, even if a federal estate tax return is not otherwise required to be filed, as would be the case for estates worth less than $5 million. 

However, in the first few years that portability was available, many executors of estates worth less than $5 million failed to file a Form 706 because they were unaware that the filing was necessary for the purpose of making the
portability election or unaware that such an election would be beneficial. 

Even if the surviving spouse’s net worth is relatively small, the best practice is to file a federal estate tax return to elect portability since circumstances and tax law change. A surviving spouse who may not be subject to federal estate tax currently may become subject to federal estate tax at a later time.

This is illustrated in the following example: Spouse A has a gross estate of $2 million and spouse B has a gross estate of $1 million. Spouse A dies, leaving everything outright to spouse B. Now spouse B has $3 million. Spouse A’s gross estate was below the federal estate tax return filing threshold of $5 million. Spouse B’s net worth is also significantly below the current threshold.

Spouse A’s executor should file a federal estate tax return for the sole purpose of electing for portability to allow spouse B to use spouse A’s remaining $3 million of federal estate tax exemption in addition to her own. If the federal estate tax law changes before spouse B dies and the federal exemption is lowered to $1 million, the surviving spouse’s $3 million estate will be over the federal estate tax exemption by $2 million.

If portability was elected for spouse A’s estate, spouse B’s estate would be entirely sheltered from federal estate tax by the combined exemptions totaling $4 million. Without the portability election, only the surviving spouse’s $1 million exemption would be available.

Under that scenario, using a greatly simplified calculation and the current tax rate of 40 percent, spouse B’s estate will owe approximately $800,000 of federal estate tax because of the failure of spouse A’s executor to elect for portability.

Prior to the issuance of Rev. Proc. 2014-18, in situations in which an executor was not otherwise required to file an estate tax return but could have done so to elect portability, it was unclear whether the estate could seek relief under Section 301.9100-3 for a late filing. 

In general, the IRS grants relief under that section if the estate acted reasonably and in good faith, and if the grant of relief will not prejudice the interests of the government. 

However, Section 301.9100-3 relief is available only to grant an extension of time to make an election whose due date is prescribed by a regulation or other regulatory guidance (and not by statute). It is settled that the due date for electing portability for those estates otherwise required to file an estate tax return under Section 6018(a) (because their value is more than $5 million) is prescribed by statute. See Sections 2010(c)(5)(A), 6075(a) and 6018(a). 

Therefore, Section 301.9100-3 relief would not be available in this case to an estate over $5 million. Until recently, it was unclear whether this relief would be available to smaller estates that were not required by Section 6018(a) to file a federal estate tax return.

The IRS was prompted to create the simplified method for relief outlined in Rev. Proc. 2014-18 after issuing several private letter rulings, including one obtained by us on behalf of our client. 

In the case we handled, an estate had failed to file a federal estate tax return because the estate was valued at less than $5 million. Upon discovering that the failure to file Form 706 for the purpose of electing portability could have a negative impact on her own estate planning, the surviving spouse retained us to seek relief that would allow the estate to make a late portability election. 

The IRS had never granted that type of relief in the past. We took the position that relief under Section 301.9100-3 was available because the executor was not required by Section 6018(a) to file the return within nine months (plus extensions). Instead, we contended that relief was available under Section 301.9100-3 since the executor had the option of filing Form 706 to elect portability, and the due date for filing only to elect portability is prescribed by Section 20.2010-2T(a) of the Estate Tax Regulations and not by statute.

We argued that an estate could obtain an extension of time to file the federal estate tax return for the sole purpose of electing portability, when a federal estate tax return was not required to be filed other than to elect portability. 

The IRS agreed, granted relief to our client, and issued Rev. Proc. 2014-18 to create a simplified method by which taxpayers in similar positions may seek relief from the service. 

It is important to note that the relief under that revenue procedure is available only to certain taxpayers and only for a limited time. Specifically, relief is limited to those estates that were not required by Section 6018(a) to file a federal estate tax return upon the decedent’s death. 

Additionally, for an estate to qualify for the simplified method under Rev. Proc. 2014-18, the decedent must have had a surviving spouse; died between Jan. 1, 2011, and Dec. 31, 2013; and been a U.S. citizen or resident at death. 

To obtain the benefit conferred by Rev. Proc. 2014-18, estates meeting the requirements must complete and file a federal estate tax return on or before Dec. 31, 2014, stating at the top of the form that the return is “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER Section 2010(c)(5)(A).”

Rev. Proc. 2014-18 also includes information about how an estate can claim a credit or refund of tax overpaid because of a failure to elect for portability. Such a claim must be filed within three years from the date the return was filed or within two years from the date the tax was paid, whichever period expires later. This is the case even if an estate tax return to elect portability has not yet been filed.

Such a claim filed in anticipation of the filing of the estate tax return by the first-to-die spouse’s executor will be considered a protective claim for credit or refund of tax. Accordingly, as long as the claim made by the surviving decedent’s estate is filed by Oct. 14, 2014, the IRS will consider and process that claim for credit or refund of tax once the first-to-die spouse’s estate has elected portability pursuant to Rev. Proc. 2014-18.

Estates that do not meet the criteria for the simplified process, including those outside the scope of the revenue procedure because the first-to-die spouse died after Dec. 31, 2013, may still request an extension of time to make the portability election under Section 2010(c)(5)(A) by requesting a private letter ruling pursuant to the provisions of Section 301.9100-3 and paying an application fee of $6,900. That is a reduction from the $10,000 filing fee previously required for such a request.

Ultimately, Rev. Proc. 2014-18 provides significant relief for surviving spouses whose estates may be subject to federal estate tax. For estates meeting the requirements, Rev. Proc. 2014-18 provides a streamlined, simplified manner by which to elect portability and obtain its benefits.

Anyone whose spouse died between Jan. 1, 2011, and Dec. 31, 2013, should strongly consider taking advantage of the simplified process prior to the Dec. 13, 2014, expiration date.

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Sarah M. Allen and Steven M. Carr are partners at Pabian & Russell in Boston. Megan Dean is a student at Boston College Law School.