Originally published on Forbes.com.
The IRS has provided some regulatory relief to the class of people I call moderate millionaires. Revenue Ruling 2017-34 eases the process for an executor to get relief from having failed to make a timely “portability election” to allow a surviving spouse to take advantage of a deceased spousal unused exclusion amount (DSUE). Fairly quick action (i.e. by the end of the year) may be required to take advantage of the relief.
DSUE?
The concept of DSUE comes from a simplification that was enacted when the estate tax was turned back on by legislation in 2010. It comes out of the interaction of what are probably the two most important provisions of the estate tax as far as moderate millionaires are concerned (A moderate millionaire has a net worth from $3 million to $20 million, by my entirely arbitrary reckoning. This distinguishes them from the mere millionaires ($1.0 to $2.9), who I found cannot get a bank trust department interested in overseeing their meager fortunes).
The two provisions are the unified credit, which protects $5.49 million from estate tax in the case of someone dying in 2017 (The number was set at $5 million for 2011 and indexed for inflation) and the unlimited marital deduction. The unlimited marital deduction allows any amount left to the surviving spouse to be free of estate tax – the entire estate, if that is what you want. I should mention the “unified” part of the credit means that the one credit applies to both lifetime taxable gifts and the estate tax payable after death. To keep things simple I’m ignoring taxable gifts.
A Simplification
Those provisions have been around a long time, but I am not going to do any tax archeology here. Back in the day the unified credit was a much lower amount, even when you consider inflation. A prime concern of basic estate planning was to make sure that a couple did not waste one of their unified credits. A typical scenario for people with mundane lifestyles where they grew old with someone they married in youth was to leave everything to the surviving spouse, who would then leave everything to their kids.
The problem with that mundane arrangement was that one of the unified credits would be wasted. When the unified credit was $600,000 a mere millionaire couple would end up subjecting a few hundred thousand to estate taxes. This created a decent amount of work for low-level estate planning attorneys creating trusts to preserve the unified credit for couples who were not really that worried about their spouses running off with the pool boy and not leaving anything behind for the kids. There was the credit shelter trust and the marital trust and in Massachusetts, there would be a third trust since the state threshold was different and the marital deduction was not unlimited.
The DSUE saves people that trouble. Assume Robin and Terry each have a net worth of $6 million. When Robin dies leaving everything to Terry, Robin’s DSUE will be available to Terry so that combined with Terry’s unified credit, almost all of Terry’s resulting $12 million estate will escape estate tax.
Some People Just Do Not Get It
The only requirement is that Robin’s executor file an estate tax return and make the election to allow Terry to use the DSUE. Unfortunately, there were a lot of executors who can’t follow simple —expletive deleted— instructions. So the IRS over the last several years has been bombarded with requests to allow late elections. There was a simplified procedure for a while, that expired on December 31, 2014, but the requests keep coming. There is a user fee for those sorts of things and a good amount of process which has been overburdening the IRS.
Relief
The relief offered by Revenue Procedure 2017-34 is available to estates of decedents who died after December 31, 2010 where no estate tax return was required and none was filed. (Imagine if Robin had negligible net worth and Terry was worth $9 million. No estate tax return was required when Robin died, but the failure to file one along with the election costs a lot when Terry dies). The executor takes advantage of the relief by filing an estate tax return with the election and making a reference to the revenue procedure at the top of the first page of the return.
This new procedure is available until January 2, 2018 . After January 2, 2018, the procedure is available up to 2 years after date of death.
Who Should Concern Themselves With This?
This is a matter that moderate millionaires need to consider if they are surviving spouses of people who died after 2010, where no estate tax return was filed. You have to weigh the administrative hassle of accomplishing the filing against the chance that you might die with a net worth over the exclusion amount. Remember it is not your current net worth, but what your date of death net worth might be. Who knows maybe one of your ships might come in?
If you do think this is something you should do, jump on it now. There may well be a premium on estate tax preparation in December. If your spouse died in 2011, gathering the information to do the return might be a bit of a project.
Tax pros should think about their widow and widower clients particularly those who have substantially boosted their net worth since their spouse died.
There is more to the procedure than I have laid out here, but I think I have given you the primary action item.
Other Coverage
Laura Sanders broke this on the Wall Street Journal – Many Estate-Tax Payers Just Got a Reprieve from the IRS, but that’s behind a paywall and might be missed by the thrifty among my readership.