Due to the increased volume of federal estate tax return filings in order to make the “portability election,” the IRS has announced that estate tax closing letters will only be issued upon request by the taxpayer. This change in IRS policy started on June 1, 2015.
What is the “Portability Election” and How is the Election Made?
The “portability election” refers to the right of a surviving spouse to claim the unused portion of the federal estate tax exemption of their deceased spouse and add it to the balance of their own exemption. The portability election went into effect for deaths occurring on or after January 1, 2011.
To properly make the election, a surviving spouse must file a federal estate tax return within nine months of the date of a spouse’s death, although a six-month extension of time to file the return can be requested. Filing an estate tax return is required to make the election even if the value of the deceased spouse’s estate does not exceed the federal estate tax exemption.
A Portability Example
The easiest way to understand how portability works is through an example. Let’s say Carol and Bob are married, all of their assets are jointly titled with rights of survivorship, their total estate is valued at $4 million, and neither spouse made any taxable gifts during their lifetimes. If Bob dies in 2015, none of his $5.43 million federal estate tax exemption will be needed since Carol will automatically inherit the entire estate through rights of survivorship. In addition, a federal estate tax return will not otherwise be required for Bob’s estate since it is valued under $5.43 million.
Nonetheless, if Carol wants to pick up Bob’s unused $5.43 million exemption and add it to her own exemption so that she can pass on up to $10.86 million when she dies, she can timely file an estate tax return for Bob’s estate and make the portability election with regard to Bob’s unused exemption.
What is an Estate Tax Closing Letter?
An estate tax closing letter is a document issued by the IRS after it determines that an estate tax return has been accepted as filed or that all required adjustments have been completed. In other words, the closing letter provides written proof from the IRS that all federal estate tax liabilities have been satisfied. An estate tax closing letter is often necessary to sell or distribute property.
New Rules for Issuance of Estate Tax Closing Letters
Prior to June 1, 2015, the IRS automatically issued estate tax closing letters. However, the IRS recently announced the following on its website in response to the increased number of federal estate tax return filings for the sole purpose of making the portability election:
“For all estate tax returns filed on or after June 1, 2015, estate tax closing letters will be issued only upon request by the taxpayer. Please wait at least four months after filing the return to make the closing letter request to allow time for processing. For questions about estate tax closing letter requests, call (866) 699-4083.”
The portability election provides another strategy that estate planning attorneys can use to lessen the burden of death taxes on your family. Like any other tax or legal strategy, you should seek competent advice to select the strategies that will work in your situation. If you have any questions about federal estate tax returns, the portability election, or the new rules regarding the issuance of estate tax closing letters, please contact our office.
To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.