Portability Election Made Easier For Estates Of Decedents Who Died Before 2014

Executors of Decedents Who Die in 2014 or Later Are Still Subject to Stricter Time Limits

On January 27, 2014, the Internal Revenue Service published Revenue Procedure 2014-18, providing a simplified method to obtain an extension of time to make the "portability" election for estate and gift tax purposes with respect to the estate of a decedent who died in 2011, 2012, or 2013 survived by a spouse.

Background

Portability of the unified credit was first enacted for two years by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, effective January 1, 2011, and then was made permanent by the American Taxpayer Relief Act of 2012. When a decedent dying on or after January 1, 2011, is survived by a spouse, the amount of the unified credit available to that decedent's estate for estate tax purposes that is not used by that decedent's estate is "portable" - that is, it can be used for gift or estate tax purposes by the surviving spouse. Although the unified credit is the actual mechanism provided by the Internal Revenue Code and operates to directly reduce the amount of estate tax (or gift tax), the available unified credit is initially calculated each year as the amount of gross tax that would be owed if the taxable estate were equal to the "basic exclusion amount," which itself is indexed for inflation each year after 2011. The "basic exclusion amount" is thus similar to an exemption, and it is often referred to as an "exemption." Any unified credit that the decedent used to reduce or eliminate gift tax paid on taxable gifts during life reduces the amount available for estate tax purposes, which is what gives the credit its "unified" character.

Examples:

(1) If a decedent who has never made taxable gifts dies in 2014 when the basic exclusion amount is $5,340,000 and leaves nothing to anyone except that decedent's surviving spouse, then the marital deduction eliminates the taxable estate, no unified credit is used, and the entire unified credit is "portable" to the surviving spouse. The effect is to increase the surviving spouse's total exclusion amount, called the "applicable exclusion amount," by that $5,340,000.

(2) If the decedent had made taxable gifts of $1,500,000 and at death left $600,000 to children, then the applicable exclusion amount available to that decedent's estate would be $3,840,000 ($5,340,000-$1,500,000) and the unused amount portable to the surviving spouse would be $3,240,000...