Portability is often an effective, go-to estate planning strategy that could make a considerable difference for taxes owed on larger estates, especially with today’s generous exemption amounts. In a recent ruling, the IRS took steps to make filing for portability even easier.
More Time to Make the Election
Revenue Procedure 2022-32 now grants a surviving spouse the ability to elect portability of a deceased spouse’s unused exemption (DSUE) up to five years after the decedent’s date of death. This means, any federal estate tax exemption not used by the deceased spouse can be claimed and added to the surviving spouse’s basic exclusion amount. With the lifetime estate tax exemption as high as $12.06 million in 2022 for individuals and $24.12 million for married couples, portability can help taxpayers avoid paying the 40% federal estate tax on their taxable estate.
Under previous law, Form 706 Estate Tax Return was required to be filed within two years of the decedent’s date of death if the sole purpose was to make a voluntary portability election of the DSUE. Taxpayers who missed the aforementioned deadline would have to request a private letter ruling, which could be costly and time consuming, with no guarantee that an extension would be approved. In an effort to reduce the number of letter rulings, this new five-year filing deadline means more time for families to sort out their estates and save on potentially high estate taxes.
The Pros of Portability
While it’s not the only estate planning strategy, the portability election is an ideal way for the surviving spouse to reduce their tax liability. Let’s see how it works: Spouse A passes away on March 1, 2022, with a taxable estate of $3,000,000 and an estate tax exemption amount of $12,060,000. Spouse B then makes a portability election and claims the remaining $9,060,000 ($12,060,000 minus $3,000,000). Spouse B passes away on October 1, 2022, with a taxable estate of $18,000,000. Spouse B has a total exemption amount of $21,120,000 ($12,060,000 federal exemption, plus the DSUE amount from Spouse A $9,060,000), which reflects no federal estate tax liability. If Spouse B did not claim portability before passing away, the estate would be subject to a 40% tax on $5,940,000 resulting in a tax liability of $2,376,000.
Bear in mind that the current federal estate tax exemption amount only applies to tax years up to 2025 and is set to expire on Dec. 31, 2025. Unless Congress extends the current law or makes it permanent, the exemption amount is expected to revert to the level it was in 2017 at $5.49 million adjusted for inflation. This means that even taxpayers with estates valued at less than $12.06 million should consider filing to elect portability in the event that the exemption threshold drops even lower in the future, while the value of assets in their estate continues to increase. Of course, there is an expense to filing the return, but it is minor compared to the potential cost (as illustrated above) if the surviving spouse’s estate is above the available exclusion amount when they pass away. No one can predict what the estate tax law will be years from now, so this is a good opportunity to lock in the higher exclusion amount and have at least some certainty for future planning.
The Cons of Portability
There are a few downsides of portability that taxpayers should be aware of before making the election. For instance, if a surviving spouse remarries and the new spouse passes away, the surviving spouse is no longer able to claim the first spouse’s DSUE; however, the surviving spouse could make a portability election within the second marriage. If a married couple prefers to have more control over their assets after death, there are other estate planning strategies, such as a credit shelter trust or a dynasty trust, that can be discussed to preserve federal exemption amounts between married couples and future generations.
Another drawback to portability is that it does not offer the same flexibility for the federal generation skipping transfer tax exemption (GST). Any GST exemption unused at the time of death is lost.
If a taxpayer’s private letter ruling request is currently pending approval, the IRS plans to close any unresolved files and reimburse the user fee. This means that Form 706 must be filed to elect portability, noting at the top of the form: “Filed Pursuant to Revenue Procedure 2022-32 to Elect Portability.”
Requirements to claim portability include: the deceased spouse must have been a U.S. citizen or resident, be survived by a spouse, and have passed away after 2010. And remember, portability is not automatic and must be elected. If the five-year deadline is missed, the surviving spouse will need to request a private letter ruling that could take months to process.
It’s best to talk with your advisor and estate planning attorney on ways to plan your estate in advance to leverage the most effective tax saving strategies for your situation. Contact R&A—our professionals can help.
About this Author
Nate is a trusted advisor for businesses and individuals, providing tax planning, compliance support, and accounting services. He also is certified as a Personal Financial Specialist which allows him to guide clients through the many challenges and phases of their career from start-up to retirement.