The first item of the guidance promised by Assistant Treasury Secretary David Kautter to be released by the end of January 2020 has been published.  In TD 9884[1] the IRS finalized regulations on the anti-clawback rules that IRC §2001(g)(2) required the IRS to develop to prevent issues when the exclusions are scheduled to be reduced in 2026.

The problem is simple—generally a taxpayer’s estate tax is computed by combining his/her taxable estate at death with his/her lifetime taxable gifts.  A gross tax is computed using that figure.  It is then reduced by a credit based on the appropriate exclusion amount plus any gift tax actually paid on taxable gifts.  If the exclusion amount at death is lower than it was when gifts were made, it’s possible that tax would be due at death with no assets available to pay the tax.

When new provisions are added to the IRC, it takes a few years for the first court cases to begin to appear on the issues raised by the new provision.  We are now beginning to see the first cases that look at the of the portability rules found in IRC §2010(c), beginning with case of the Estate of Minnie Lynn Sower v. Commissioner, 149 TC No. 11.

The portability rules, first added to the law in 2010 and made a permanent part of the law in 2012, are meant to allow a surviving spouse to have the use of any unused exclusion amount from the deceased spouse’s estate, so long as the deceased spouse’s estate files an election to make that amount available to the surviving spouse. [IRC §2010(c)(4)]

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In Revenue Procedure 2017-34 the IRS published a simplified method to obtain permission for an extension of time under Reg. §301.9100-3 to file a Form 706 and elect portability without the need to apply for a private letter ruling and pay the associated fee.

Under IRC §2010 a surviving spouse may make an election to claim any lifetime transfer tax exclusion that was not used to reduce the estate tax on the deceased spouse.  This amount, known as the deceased spouse unused exclusion amount (DSUE) can end up being equal to the entire maximum lifetime transfer amount ($5,490,000 for 2017), especially if the deceased spouse left his/her entire estate to his/her spouse.

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In Chief Counsel Email Advice 201650017 the IRS confirmed what had been strongly hinted at in private letter rulings issued that allowed late portability elections under IRC §2010—that relief is not available to estates if a Form 706 was otherwise required to be filed but the estate did not do so.

The IRS has traditionally taken the position that its authority to grant taxpayers relief to make elections after their due date is limited to elections whose date is set by regulations.  If a date is set by statute, the IRS position is that the agency lacks the authority to grant relief.

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In Private Letter Ruling 201536005 the IRS granted an executrix, who was also the surviving spouse of the decedent,  the right to make a late portability election under IRC §2010.  By making that election, the estate of the surviving spouse will be able to take into account the decedent’s deceased spousal unused exclusion amount (DSUE).

With the temporary regulations on portability set to expire at the end of June, 2015, the IRS issued the final regulations on the portability election under IRC §2010 in TD 9725.  These regulations generally apply to estates of decedents dying on or after June 12, 2015 and gifts made on or after that date.

Generally the portability rules are one of the most significant developments in the area of estate taxation since the introduction of the unlimited marital deduction for transfer tax purposes in the Economic Recovery Tax Act of 1981 and, when combined with the significantly increased unified credit, significantly modifies the issues to be decided when a couple establishes an estate plan.