More Families Can Now Take Advantage of Estate Tax Exemption Portability

The IRS recently amended its simplified process for requesting an extension of time to make a “portability” election.

For wealthy families, the IRS improved a process that could result in millions of dollars in tax savings. The strategy, known as estate tax exemption portability, or just portability, is used by high-net-worth married couples to reduce or eliminate federal estate taxes when the second spouse dies.

What Is Portability?

When a spouse dies, the surviving spouse may inherit all of their partner’s assets tax-free because of what’s called the marital deduction, which is unlimited. When this happens, the estate tax exemption that would otherwise have been available to the spouse who died first is unused because of the unlimited marital deduction. This estate tax exemption is called by many names, but most often it is called the “unified tax credit,” because it’s the combined total that an individual can gift — during his or her lifetime and upon death — before any gift or estate taxes are imposed. This tax credit unifies the gift and estate taxes into one tax system that decreases the tax bill of the individual or the estate, dollar for dollar. Depending on the total estate value, estate taxes may be owed within nine months after the death of the surviving spouse. Before 2011, to utilize the estate tax exemption of both spouses, a specialized “credit shelter trust,” also called a “bypass trust,” used to be required upon the death of the first spouse to die.

In 2011, the IRS did away with the need to create a credit shelter trust, instead allowing for the transfer/portability of a deceased spouse’s unused estate tax exemption to the surviving spouse. But this portability is not automatic; rather, the administrator of the estate of the first spouse to die must file a timely federal estate tax return in order to “check the box” claiming portability, even though there is no other reason to file an estate tax return because there is no estate tax owed because of the unlimited marital deduction. Timely means when the estate tax return is due, which is a very short nine months after the date of death. This filing requirement created a trap for surviving spouses and personal representatives of estates who were not aware of the filing requirement after the death of the first spouse, and for years the IRS found itself inundated with private requests to allow an extension of time to request portability, which requests were routinely granted.

In June 2017, to reduce the administrative expense to the IRS of processing and granting so many private requests for filing extensions, the IRS issued Revenue Procedure 2017-34, which created a simple process to request an automatic extension of time to file an estate tax return (and make the portability election) — providing up to two years immediately following the decedent’s date of death to request an automatic filing extension.

However, even after this new process was enacted, the IRS continue to be inundated with requests for filing extensions, which were still routinely granted, because numerous estates still missed the two-year deadline because the surviving spouse or personal representative still did not realize they were required to file a federal estate tax return even for a non-taxable estate.

The IRS has therefore now issued IRS Revenue Procedure 2022-32, which updates this simplified process by giving personal representatives of an estate the ability to request an automatic extension of up to five years from the date of death to file the return and elect portability. The new rule went into effect on July 8, 2022.

Here’s what else you need to know:

  • In 2022, there’s a combined $12.06 million exemption per person for gifts you make during your life and transfers of your estate upon your death, meaning neither you nor your estate will owe federal gift or estate taxes for giving away $12.06 million or less to your children or other non-spouse beneficiaries during life or at your death. However, if you’re in the top 2 percent of wealthiest people in the country, you’ll owe 40 percent gift and estate taxes on anything above that $12.06 million.
  • The surviving spouse may elect portability (and now has five years to file the required estate tax return and elect the portability option), allowing them to have their deceased spouse’s unused exemption along with their own. That means a married couple can gift $24.12 million before federal gift or estate taxes are owed.
  • As explained, effective July 8, 2022, survivors now have five years from the date of the spouse’s death to claim portability for the survivor.
    • If your spouse has passed away on or since July 8, 2017, you may still file for portability.
    • The special five-year election window is only available if the first deceased spouse didn’t require an estate tax return, according to the IRS.

Why Electing Portability Is a Wise Idea

Claiming portability is a wise idea when the surviving spouse has substantial assets, and the likelihood is that his/her own estate will be taxable upon death. But claiming portability can also be a smart move for a surviving spouse with more modest assets. Here’s why:

  • The current $12.06 million per person exemption will adjust for inflation through 2025. However, in 2026, the exemption is scheduled to drop by roughly one-half when provisions from the 2017 tax legislation sunset. It is estimated that in 2026, the per-person estate tax exemption will drop to around $6.5 million, meaning around $13 million with portability.
  • Preserving the portability option is a safeguard against future reductions in the estate tax exemption that would make even smaller estates subject to federal estate tax (such as the dramatic reduction that will occur in January 2026).
  • Preserving portability is also worthwhile even for young couples, because there is the chance that the survivor could accumulate significant wealth in future years.
  • Please note, however, that if you are a surviving spouse and you remarry, you lose the right to your prior spouse’s unused exemption – even if portability had been properly filed for and preserved.

Revised Relief – What Estates Qualify?

Under the new procedure, the personal representative of the decedent’s estate may elect for portability of the Deceased Spouse’s Unused Exclusion (DSUE) to a surviving spouse if:

(1) the decedent died after Dec. 31, 2010;

(2) the decedent was a U.S. citizen or resident on date of death;

(3) the decedent’s estate isn’t required to file an estate tax return (that is, the decedent’s estate is below the filing threshold in IRC Section 6018(a)); and

(4) the estate didn’t in fact file a timely estate tax return.

To avail themselves of the new procedure, the executor of the decedent’s estate is required to file a completed estate tax return on or before the fifth anniversary of the decedent’s date of death.

How to Claim Portability

IRS Form 706, the federal estate tax return, must be filed for the deceased spouse in order for the surviving spouse to inherit the DSUE through a portability election on that return.

  • To claim portability, the 706 must be filed even if the estate of the decedent is not subject to federal estate tax.
  • An estate tax return may cost a taxpayer several thousand dollars or more, depending on the complexity and where you live, but when you compare that to saving 40 percent on every million dollars of the portability exemption, it’s a wise decision to file it.

A Portability Election Could Make for Significant Tax Savings

Even if a surviving spouse’s assets are currently insufficient to trigger estate taxes, future asset appreciation or a sudden windfall such as lottery winnings or an unexpected inheritance could quickly result in a taxable estate. Making a portability election now could result in significant tax savings for the surviving spouse’s beneficiaries. Since every estate is unique, it is important to consult with an experienced estate administration attorney, such as those at the Farr Law Firm, to determine whether a portability election is appropriate in a given situation.

Get Your Estate Administration in Order Today!

Changes such as those described are among the reasons why the need for estate administration is so important. Most married couples own all of their assets jointly with survivorship, and therefore are able to inherit assets seamlessly when one spouse dies. Because of this, most surviving spouses don’t realize that they should always see an estate administration attorney to discuss what needs to be done upon the death of the first spouse, if anything. Many married couples with older style trusts, especially trusts done prior to 2010, have provisions in them requiring that a credit shelter trust be created upon the death of the first spouse. Many trusts have provisions in them requiring that other things be done upon the death of the first spouse, such as the creation of sub-trusts or asset protection trusts for children.

If your spouse has died and you have not yet visited an experienced estate administration attorney, the time to do so is now — please call the office to schedule an appointment with Sara Barr, the attorney shareholder in charge of trust and estate administration with the Farr Law Firm:

Estate Administration Fairfax: 703-691-1888
Estate Administration Fredericksburg: 540-479-1435
Estate Administration Rockville: 301-519-8041
Estate Administration DC: 202-587-2797

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About Evan H Farr, CELA, CAP

Evan H. Farr is a 4-time Best-Selling author in the field of Elder Law and Estate Planning. In addition to being one of approximately 500 Certified Elder Law Attorneys in the Country, Evan is one of approximately 100 members of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys and is a Charter Member of the Academy of Special Needs Planners.