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.

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.

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)

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)

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 |

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.