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BY: JOHN H. TURNER, III & JEFFREY D. CHADWICK
In December 2010, Congress created a new right of "portability" between spouses,to remedy the circumstance in which spouses were unable or unwilling to engage in estate tax planning. For deaths occurring in 2011 and 2012 only, the applicable estate tax exclusion amount that remains unused at a spouse's death (defined as the "deceased spousal unused exclusion amount" or "DSUEA"), is available for use by the surviving spouse, in addition to such surviving spouse's own applicable exclusion amount. For more information regarding the mechanics and rules governing portability, please see our October 3, 2011 Alert entitled, Understanding Portability of Unused Spousal Exclusion: Avoiding the "sue" in DSUEA.
The DSUEA is available to a surviving spouse only if an election is made by the deceased spouse's executor on a timely filed estate tax return (Form 706). Generally, the executor must file a Form 706 within 9 months of the date of the decedent's death, plus any applicable extensions. Estates are entitled to an automatic 6-month extension to file if a Form 4768 is filed on or before the original Form 706 due date.
Undoubtedly, these new portability rules have not been fully absorbed by the public. In fact, the 2011 Form 706 was released shortly before the first returns for 2011 were due. In response to the concerns of many practitioners, the IRS issued Notice 2012-21, which provides certain estates with the ability to obtain a retroactive extension to file Form 706 to preserve portability.
In Notice 2012-21, the IRS grants the executor of a "qualifying estate" a six-month extension (until 15 months after the deceased spouse's date of death) to file a Form 706 for purposes of making a late portability election. The Notice generally defines a qualifying estate as the estate of a decedent:
To take advantage of the extension granted by Notice 2012-21, executors of qualifying estates should file Form 4768, no later than 15 months after the decedent's date of death, with the IRS office designated in the Form's instructions. The executor should enter at the top of Form 4768 the notation, "Notice 2012-21, Extension for Good Cause Shown," or otherwise sufficiently notify the IRS that the Form 4768 is being filed pursuant to Notice 2012-21.
If an executor of a qualifying estate filed a Form 706 after the due date for filing Form 706 had passed, but before 15 months from the decedent's date of death, without having timely requested an automatic 6-month extension to file Form 706 (via Form 4768), the executor may file a Form 4768 now, in accordance with the requirements of Notice 2012-21, and the extension will relate back to the due date of Form 706. In addition, if an executor of a qualifying estate has not filed a Form 706 and the due date has passed, the executor may now file Form 4768 at the same time as the executor files Form 706, so long as both are filed on or before the date that is 15 months after the decedent's date of death.
Unlike most tax elections, there appears to be very little downside to a fiduciary's preservation of the DSUEA, particularly because it is the only way to maximize a married couple's estate tax exclusion amount in certain circumstances. On the flip side, if a fiduciary fails to make an election to preserve the DSUEA, that fiduciary has created the potential for significant fiduciary liability. Notice 2012-21 gives executors of qualifying estates an extended or second chance to preserve the DSUEA. Executors should take advantage of this relief offered by the IRS and seriously consider filing a Form 4768 to maximize the time in which a Form 706 may be filed.
For more information about this topic, please contact the authors or any member of the Williams Mullen Private Client & Fiduciary Services Team.
Please note: This newsletter contains general, condensed summaries of actual legal matters, statutes and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel. For more information, please visit our website at www.williamsmullen.com or contact John H. Turner, III, 804.420.6480 or firstname.lastname@example.org. For mailing list inquiries or to be removed from this mailing list, please contact Julie Layne at email@example.com or 804.420.6311.
© 2012 WILLIAMS MULLEN ALL RIGHTS RESERVED
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