Loss of the Portability Election: Estate of Rowland v. Commissioner

Summary

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Episode Overview

Main Theme:
This episode of ACTEC Trust & Estate Talk examines the recent Tax Court decision in Estate of Rowland v. Commissioner (2025), focusing on the loss of the federal estate tax portability election due to improper filing. The discussion centers on the mechanics of portability, procedural pitfalls, and crucial lessons for estate planners and their clients when making portability elections.

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Key Discussion Points and Insights

1. Understanding Portability in Estate Planning

• Definition:
  Portability allows a surviving spouse to "capture" any unused federal estate tax exemption ("deceased spousal unused exclusion" or DSUE) from the estate of the first spouse to die, so the surviving spouse can use it for personal lifetime gifts or at death.
  “[Portability] is only available for married couples after the first spouse's death… and can make an election on the estate tax return to transfer unused estate tax exemption to a surviving spouse.” (Scott Fillmore, 01:21)

• Case Background:
  Fay Rowland died in April 2016; her estate allocated assets between charity, her spouse (Billy Rowland), and trusts for grandchildren. The estate value ($3 million) was below the 2016 exemption ($5.45 million).

2. Procedural Missteps in the Rowland Estate

• Late and Incomplete Estate Tax Return:

  • The estate tax return was filed nearly six months after the extended deadline (12/2017).
  • Instead of itemized asset valuations, the estate reported only estimated values, invoking the "relaxed reporting rules" intended for straightforward marital or charitable bequests.

• Critical Error:
  “Those regulations apply only to assets going to a surviving spouse or a charity… On Faye’s estate tax return, the estate failed to distinguish between marital and charitable deduction property and other assets.” (Scott Fillmore, 02:54)

• Complexity:
  The estate included hard-to-value closely held business interests, making accurate reporting all the more important.

3. Timing and Rules for Portability Elections

• Revenue Procedure 2017-34 & Its Replacement:

  • Rev. Proc. 2017-34 allowed certain late portability elections (within 2 years of death).
  • Newer Rev. Proc. 2022-32 extends this to 5 years, but requires the return be “complete and properly prepared.”

• Regulation Limits:
  The “relaxed reporting rule” applies only when assets pass exclusively to spouse or charity. When distributions affect other beneficiaries (e.g., grandchildren’s trusts), full itemized valuations are mandatory.

4. Billy Rowland’s Estate and Tax Consequences

• Impact:
  After Billy died (2018), his estate claimed Fay’s unused exclusion, combining it with his own larger allowance from the Tax Cuts and Jobs Act. But because Fay’s portability election was invalid, Billy’s estate lost $3.7 million worth of potential estate tax exclusion.

  “The bottom line here is that Billy's estate lost the ability to use $3.7 million of a DSU amount.” (Scott Fillmore, 07:32)

5. Disposition and Lessons for Advisors

• Court’s Reasoning:

  • The Tax Court held that the Rowland estate’s tax return did not qualify for the relaxed disclosure rule and was not “complete and properly prepared.”
  • The estate’s argument for “substantial compliance” was rejected; the court did not decide whether substantial compliance could ever suffice, only that it didn’t here.

  “Maybe the decision in Rowland is not a surprising result given the facts—but perhaps an example of the problems that can arise… when an estate plan intends to rely on portability rather than… a credit shelter trust.” (Scott Fillmore, 08:21)

• Policy Reminder:
  The IRS will not rule on the validity of a portability election until after the surviving spouse’s death, meaning even apparently acceptable filings can later be challenged at a costly moment.

6. Planning Takeaways

• Always ensure estate tax returns for portability are timely, complete, and properly prepared.
• Distinguish clearly between marital/charitable and other dispositions on the return.
• When in doubt, consider alternative strategies (like credit shelter trusts) for large or complex estates.
• Keep up with current IRS procedures: The window for late elections is now five years, but all substantive requirements remain.

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Notable Quotes and Memorable Moments

• On the Core Mistake:
  “The court found that Faye’s estate’s return was not in compliance with the Treasury regulations and… would not have qualified for the relaxed reporting rule anyway because the marital and charitable disposition affected the value that was distributed to other beneficiaries.” (Scott Fillmore, 05:18)

• On Finality:
  “The IRS will not determine whether a portability election is valid after the first death but before the second death… You can’t get any real certainty regarding a portability election until after the surviving spouse’s death.” (Scott Fillmore, 08:45)

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Timestamps for Key Segments

• 00:39 — Travis Hayes introduces the episode and guest, Scott Fillmore
• 01:21 — Fillmore begins explanation: Portability election basics, facts of Rowland case
• 03:14–06:12 — What went wrong: Return filing errors, asset valuation, and regulatory requirements
• 06:14–07:32 — Summary of IRS & Court findings; consequence for the Rowland estate
• 07:33–09:01 — Substantial compliance argument, alternative estate planning, IRS policy on certainty
• 09:19 — Closing remarks (main discussion ends)

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Summary Table: Rowland v. Commissioner – Portability Pitfalls

| Topic | Rowland Facts | Key Takeaway | |------------------------------|---------------------------------------------|----------------------------------| | Return Timeliness | Filed late (within Rev Proc window) | Must be timely + complete | | Asset Valuation | Estimated, not itemized | Itemization crucial if others inherit | | Reporting Rules | Relied on “relaxed” rule wrongly | Only valid for marital/charitable bequests | | Impact | $3.7 million DSUE forfeited | Compliance is essential | | “Substantial Compliance” | Argued, but court rejected | Doctrine unreliable here |

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Conclusion

This episode delivers a clear warning for planners: Technical compliance matters in portability elections. The case exemplifies the risks of procedural errors and underscores the importance of detailed, informed filing for all client estates—even (and especially) those intending to rely on portability to maximize transfer tax benefits. Estate planners must stay current, meticulous, and cautious, as IRS and court scrutiny can have major financial implications for surviving spouses and heirs.

Transcript

[A]

Loss of the portability Election and the estate of Rowland vs. Commissioner case that is the subject of today's ACTEC Trust and Estate Talk.

[B]

Welcome to ACTEC Trust and Estate Talk from the American College of Trust and Estate Council, a professional society of peer elected trust and estate lawyers in the United States and around the globe. The this series offers professionals best practice advice, insights and commentary on subjects that affect our profession and clients. And now our ACTEC Fellow host with today's topic.

[A]

This is ACTECH Fellow Travis Hayes from Naples, Florida. The portability election has become a familiar and often relied upon tool in estate planning, allowing a surviving spouse to capture unused estate tax exclusion from the first spouse to die. But what happens when an estate fails to make that election on time or to make the portability election at all? The recent Estate of Roland vs Commissioner decision offers a sharp reminder that the IRS and the Tax Court are not always forgiving and that procedural missteps can carry long lasting tax consequences. ACTEC Fellow Scott Fillmore of Minneapolis, Minnesota joins us today to walk through the Rowland case, what went wrong and what planners should take away to protect their clients. Welcome Scott.

[C]

Thank you Travis. Roland vs Commissioner is a tax court memorandum decision released on July 15th of 2025 and this case deals with the validity of a portability election. Now a quick definition for those who are unfamiliar. A portability election is only available for married couples after the first spouse's death. If that spouse's estate is not large enough to use up all that spouse's estate tax exemption, then that spouse's estate can make an election on the estate tax return to transfer or port unused estate tax exemption to a surviving spouse. The unused estate tax exemption that is transferred to the surviving spouse is called the deceased spousal unused exclusion amount or DCU amount and the surviving spouse can use the DESU amount in addition to the surviving spouse's own gift or estate tax exemption for making future gifts or for the surviving spouse's own estate. So the predeceased spouse here was Fay Rowland, who died in April of 2016. Faye's estate plan under her trust agreement directed that 20% of the estate go to a charitable foundation and that her surviving spouse, Billy Roland received one fourth of the growth gross estate. The remainder was to be distributed to trust for grandchildren. The estate reported an estimated gross value of 3 million which was below the estate tax exemption at that time. It was 5.45 million in 2016. The estate filed an estate tax return in December of 2017, so it was filed late almost six months after after the extended filing deadline. Under the statute and regulations, portability elections can only be made on a timely filed estate tax return. However, Phase Estates sought to elect portability under Revenue Procedure 2017-34, which authorized portability elections for certain estate tax returns filed late. The estate tax return did not provide itemized valuations for assets on the various schedules of the estate tax return. Instead, it estimated the gross value of the estate and claimed the entire estate fell under the relaxed reporting rules contained in the treasury regulations addressing portability. I'll get a little more detail about this in a minute, but basically those regs say that the estate does not need to follow all the numerous requirements for the disclosure of assets on an estate tax return. But those regulations apply only to assets going to a surviving spouse or a charity, and a marital or charitable deduction will be claimed for those assets now on phase estate tax return. The estate failed to distinguish between marital and charitable deduction property and other assets. And the value of each asset was especially important here because there were hard to value closely held business interests making up a large portion of the estate. So, shortly after Faye's estate tax return was filed In January of 2018, Billy passes away. And on a timely filed estate tax return, his estate sought to use Faye's DU amount. So Billy died after the Tax Cuts and Jobs act was enacted in 2017. His estate had a much larger exemption than Faye's did. It was 11.18 million. And with the du amount from Faye's estate, the estate claimed the exemption at his death was nearly $15 million. Now, Billy's estate, the penny doesn't actually say, but his estate must have been roughly in excess of $25 million. So his estate still needed that DC amount from Fay's estate. The IRS challenged the validity of the portability election made on Faye's estate and moved for summary judgment on that issue. Now, first, a portability election is only valid if the estate files a complete and properly prepared estate tax return. But the regulations establish a special rule for marital or charitable deduction property where the estate is not required to file a return, it's filing just to claim portability. In that case, the executor is not required to report the value of each item but property, but quote only the description, ownership and or beneficiary of such property, along with all other information necessary to establish the right of the estate to to the deduction. Further, the executor must exercise due diligence in determining the estimated value of such property. But where the value of the marital or charitable disposition is needed to determine the value passing to someone other than a surviving spouse or a charity. This exception in the regulations does not apply and the fair market value of the assets need to be stated on the estate tax return. So Phase Estate claimed the relaxed reporting rule for the entire estate providing only an estimated total value. So consequently the court found that phase of State's return was not in compliance with the treasury regulations and Faith Estate would not have qualified for the relaxed reporting rule anyway because the marital and charitable disposition affected the value that was distributed to other beneficiaries, the remainder interest going to the grandchildren. So the return also failed to provide itemized valuations for any assets which is also required by the portability regulations. Now back to Revenue Procedure 2017-34. It authorized late portability elections for certain estate tax returns that are filed within two years of the decedent's death. So phase return was filed within the time period authorized by the RevProc to. But that RevProc still requires a complete and properly prepared return, so relief under the REVPROC was not available. The bottom line here is that Billy's estate lost the ability to use $3.7 million of a DSU amount. Keep in mind the revenue procedure of 2017-34 was superseded by RevProc 2022-32, which extended the period within which an estate under the exemption may make a portability election to on or before the fifth anniversary of the decedent's death. So it went from two years to five years. But the estate must still meet the requirement that the return be complete and properly prepared. Billy's Estate also argued in this case that Fay's return substantially complied with the requirements and should be deemed valid. The court rejected that argument. It did not determine whether the doctrine of substantial compliance compliance could ever apply in this situation. It just stated that assuming substantial compliance was even available here, the estate could not qualify. So maybe the decision enroll in is not a surprising result given the facts, but perhaps an example of the problems that can arise after a first spouse's death when an estate plan intends to rely on portability rather than following other alternatives such as funding a credit shelter trust. And keep in mind also that the IRS will not determine whether a portability election is valid after the first death but before the second death. And this is not something that's on the no ruling list that the IRS issues every year. But there are several recent private letter rulings on portability elections where the IRS stated they're not expressing an opinion on the validity of a portability election before the surviving spouse's death. So you can't get any real certainty regarding a portability election until after the surviving spouse's death. So that's the summary of Roland and v. Commissioner. A good case to keep in mind the next time you are involved in making a portability election.

[A]

Thank you thank you, Scott, for discussing the Rowland case and the reminders and warnings that estate planning advisors should take from the decision.

[B]

Thank you for listening to this episode of ACTEC Trust and Estate Talk, the podcast series about wealth planning matters from the American College of Trust and Estate Council. To find an ACTEC lawyer near you, visit actec.org Please subscribe to this series and leave us a rating or a review.