Under current law, the executor of a Decedent’s estate must timely file Form 706 to elect portability of a deceased spouse’s unused exemption amount. The ultimate tax savings of a timely portability election can be significant, effectively doubling the available estate tax exemption amount (from about $5.4 Million to $10.8 Million). For example, suppose a surviving spouse’s estate is worth $8 Million. All assets had been co-owned with his spouse prior to his or her death. That estate might be on the hook for about $1M in estate taxes at the surviving spouse’s death. However, had the executor of the pre-deceased spouse’s estate timely filed a portability election, then under current law, the tax bill would have been zero at the surviving spouse’s death. That’s an important tax election!
Our client’s prior attorney failed to advise him to make a portability election after his wife’s death in 2012. As a result, his heirs might have been hit with about $1 M in estate taxes, assuming tax laws remained unchanged at his death. Had his attorney or CPA told him to timely file a form 706 and make a portability election, or referred him to competent counsel, these taxes could have been avoided entirely.
Although our client had no idea he had been improperly advised, he decided to switch attorneys for personal reasons. While reviewing his estate planning matters, we quickly discovered the huge, $1 Million+ oversight by the prior attorney. Our options were to sue the attorney (or CPA) for malpractice, or request an IRS private letter ruling. Fellow estate planning attorneys believed that suing the attorney was the only option, because the IRS had no obligation to grant an extension. The client was way past deadline, and the attorney had more or less conceded his mistake.
Fortunately for our client, we did not follow the advice from our colleagues, and instead filed a private letter ruling request with the IRS. We asked the IRS for an additional extension to file form 706 on the basis that our client had acted reasonably and in good faith; had not been advised by his attorney or CPA to make a portability election; had discovered the possibility of the election only after the deadline had passed; and that granting the relief would not prejudice the interests of the government. We included affidavits from the attorney and CPA admitting that they had failed to properly advise our client.
The IRS agreed with our argument, and granted our client a 120-day extension to file form 706. We promptly filed a form 706, making sure to elect portability. Our client is now one happy customer, as are his heirs.
Moral of the story: keep in mind, Private Letter Rulings (PLRs) are case-specific, and cannot be relied on as legal precedent. Instead of hoping you will get a favorable ruling, make sure to get your trust planning sorted out with an attorney while you are still alive and well. If your spouse has recently passed away, promptly consult an attorney who prepares form 706 to determine whether to make a portability election.