IRS temporarily softens portability election rules

Ohio residents may be aware that the unused portion of a deceased individual’s federal estate tax exemption can be used by their surviving spouse, but they may not be aware that the strict paperwork required to obtain an extension for what is known as a portability election has led to the Internal Revenue Service being inundated with requests from executors. This soon developed into a major problem for the cash-strapped federal agency, and it announced in June that it would be addressing the issue by temporarily softening the rules dealing with portability election extensions.

Before the temporary procedural change was announced, executors who had not filed timely portability elections were required to pay a user fee, submit a request letter and then wait for the IRS to respond. Under the new rules, a deceased spouse’s unused estate tax exemption is made available immediately after a properly completed Form 706 has been filed. However, this easing of the rules is designed to clear an administrative backlog and not make life easier for taxpayers, and executors should be aware that the former regulations will go back into effect on Jan. 2, 2018.

The simplified rules will apply to the estates of U.S. citizens or permanent residents who died after Dec. 30, 2010, and are survived by a spouse. Executors who have failed to submit the required portability election paperwork in a timely manner may take advantage of the temporary IRS procedure if the estate in question was not required to file a Form 706 for estate tax purposes.

Attorneys with estate administration experience may seek to avoid unnecessary administrative tasks and unwanted IRS scrutiny by ensuring that important tax documents and forms are properly completed and filed on time. Attorneys could also suggest incorporating trusts in the estate plans of individuals with significant assets.