A Real Case with Real Consequences

Sometimes the most expensive mistakes aren’t about poor investments or flawed strategies, they’re about paperwork.

In the case of Estate of Rowland v. Commissioner, a family lost access to millions of dollars in estate tax savings because the executor failed to properly elect “portability.” This powerful but particular rule allows a surviving spouse to use the unused estate tax exemption of the first spouse to die. The catch: you must affirmatively claim it on a timely, complete, and properly prepared estate tax return.

The result in Rowland was harsh but clear. Because the executor filed the estate tax return late and with incomplete asset valuations, the IRS denied the portability election. When the surviving spouse later died, her estate was far larger than her individual exemption could cover. Millions of dollars were lost to taxes that could have been avoided.

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Why This Matters to More Than Just the Ultra-Wealthy

It’s easy to dismiss this as a problem for billionaires, but it’s not.

Today’s federal estate tax exemption is at a historic high (over $13 million per person), but it is scheduled to be cut nearly in half after 2025. When you factor in the future growth of real estate, investments, or a family business, an estate that appears safe today could easily cross into taxable territory tomorrow.

That’s why portability is so critical. It’s not just for the wealthy—it’s a form of insurance. By filing a return when the first spouse dies, you lock in their unused exemption, protecting your heirs from a future tax surprise.

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What Is Portability and How Does It Work?

Each person can pass a certain amount of wealth free of federal estate tax—this is the "basic exclusion amount." For married couples, portability allows the surviving spouse to add the unused portion of the first deceased spouse’s exclusion to their own.

Think of it as doubling your shield against estate taxes. But unlike many tax rules, this benefit is not automatic. To secure it, the executor of the first deceased spouse's estate must file a federal estate tax return (Form 706) within the deadline, even if no tax is due.

In short: you only get portability if you ask for it correctly, and you only get one chance to do it right.

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What Went Wrong in Rowland

The estate's failure was not one mistake, but a series of them:

• Late Filing: The estate tax return was filed more than a year after the extended deadline had passed.

• Incomplete Valuations: Crucial assets were listed with placeholders like “value to be determined” instead of actual, good-faith estimates.

• Failed Arguments: The estate argued for "substantial compliance," but the Tax Court ruled that the regulations for electing portability are strict and absolute.

The IRS disallowed the election, and the Tax Court agreed. The court made it plain: the rules are a "bright-line test," and the family paid the price for not meeting it.

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The High Cost of a Missed Election

The lost exemption translated directly into millions of dollars in additional taxes for the heirs. Money that could have supported children, grandchildren, or charitable causes was instead paid to the U.S. Treasury—all because of a technical filing error.

It’s a sobering reminder: a brilliant estate plan is worthless without proper execution.

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How to Avoid the Rowland Mistake

Every married couple should consider these steps:

1. File the Return: Plan to file a Form 706 when the first spouse dies, even if the estate is well below the filing threshold.

2. File on Time: The deadline is nine months from the date of death. A six-month extension is available and should be filed if needed.

3. Get Valuations Right: Placeholders are unacceptable. Every asset must be valued with a documented, good faith estimate as of the date of death.

4. Work with a Qualified Advisor: The rules are unforgiving. Professional guidance from an experienced CPA or attorney is essential to navigate the complexities of Form 706.

5. Don't Rely on Relief Provisions: While the IRS offers a relief procedure (Rev. Proc. 2022-32) that allows up to five years to file a return solely to elect portability, relying on this is risky and should not be standard practice. The Rowland case proves that timely, correct filing is the only guaranteed path.

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Portability at a Glance

• What it is: The ability to transfer a deceased spouse’s unused estate tax exemption (the Deceased Spousal Unused Exclusion, or DSUE) to the surviving spouse.

• How much it’s worth: Up to the full federal exemption, which was $13.61 million in 2024. This amount is scheduled to revert to an inflation-adjusted ~$7 million in 2026.

• How to get it: The executor must file a complete and properly prepared Form 706 within 9 months of death (plus a 6-month extension).

• The Golden Rule: The election is not automatic. "Close enough" is not good enough.

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The Bottom Line

The Estate of Rowland is a powerful cautionary tale. The IRS and the courts demand strict compliance with portability rules.

At O’Brien Panchuk LLP, we help clients ensure their estate plans don't fall apart in the details. A single missed filing should never be the reason your family’s legacy is diminished.

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