Due date for federal estate tax portability election extended
With the current federal estate tax exemption of $12.06 million per individual as of January 1, 2022, taxpayers with estates less than the current exemption may overlook estate tax planning opportunities available. However, in anticipation of the sunset of the increased estate tax exemption as of January 1, 2026, one opportunity to be revisited for taxpayers whose spouse has passed away is the federal estate tax portability election.
As a result of July 2022 guidance issued, the IRS has extended the time allowable for the executor of a spouse’s estate to consider and make the federal estate tax portability election from two years to five years.
This increase in time to effect the election allows executors, spouses and families more time to identify if the portability election is the right option for their estate. The time extension also provides an opportunity to mitigate the impact of possible market/economic changes occurring after the deceased spouse’s passing. Such a change in market or economic conditions can result in the surviving spouse either having a taxable estate or hovering closer to that level than originally anticipated at the deceased taxpayer’s death.
Overview of portability of the estate tax exemption
Established in December 2010 legislation and made permanent via The American Taxpayer Relief Act, signed into law January 2, 2013, Portability of the Estate Tax Exemption is only available to married couples and allows the surviving spouse to receive a transfer of the deceased spouse’s remaining unused estate tax exemption at the first spouse’s death. The surviving spouse may then add the deceased spouse’s unused exemption (“DSUE”) to their own estate tax exemption remaining to use on future gifts considered during their lifetime or at death, subject to certain conditions and requirements.
While other reasons to consider and plan for ownership/titling of assets between spouses continue to be top of mind, such as planning opportunities for tax basis step up to fair market value, the existence of the portability election removes some of the urgency related to transfer of assets between spouses to effect full use of the estate tax exemptions available to each spouse separately. The election also allows the spouses to consider their estate tax exemptions as a combined amount for planning purposes.
How does a surviving spouse make the estate tax portability election?
In order to make the estate tax portability election, the surviving spouse (or the estate’s executor on behalf of the surviving spouse) must file an estate tax return, Form 706, even if an estate tax return filing is not otherwise required.
The original legislation provided that the election was required to be made on a timely filed estate tax return, including extension, which provided the surviving spouse or executor between 9 months and 15 months, depending on extension filing, from the first spouse’s date of death to consider the portability election. However, as the legislation originally provided no relief to estates, which otherwise did not have a filing requirement, to make a late election, estates were forced to make private letter ruling requests to request the late election. Due to the volume of requests received, in 2017 the IRS issued guidance in Revenue Procedure 2017-34 to allow a two year period for estates for which no Form 706 filing requirement existed to file an estate tax return to timely elect the estate tax portability for the deceased spouse’s unused exemption.
In July 2022, the IRS addressed continued demand by estates for relief for late elections by issuing Revenue Procedure 2022-32 which extends the period from two years to five years to make the portability election. The IRS noted that many of the requests involved estates where the deceased spouse passed away within the five-year period. The guidance, effective as of July 8, 2022, does not expand or alter the scope/requirements for qualification of estates eligible for this relief nor did it alter the filing requirements that must be met to make a timely election, other than to update the reference on the filing to the updated guidance, Revenue Procedure 2022-32.
Simplified method for portability election for estate not otherwise required to file estate tax return, Form 706
The procedure for an estate, for which the decedent has a surviving spouse, to elect portability of the federal estate tax exemption applies to estates that are not otherwise required to file an estate tax return because the combined value of the gross estate and adjusted taxable gifts is under the filing threshold. It is important to note that the estate may not have already filed an estate tax return, Form 706 and still qualify for this relief.
Under the updated procedure, an extension request must be made on or before the fifth anniversary of the decedent’s death. This simplified method, which doesn’t require a user fee, should be used in lieu of the letter ruling process which does typically require a fee. If an estate has previously filed a request for a letter ruling seeking an extension of time to make a portability election which was pending in the National Office as of July 8, 2022, IRS Revenue Procedure 2022-32 provides that the ruling request will be closed without review and the user fee will be refunded. The estate must now follow the procedure under Revenue Procedure 2022-32 to elect portability of the federal estate tax exemption for the qualifying estate.
With the sunset of the current estate tax exemption approaching as of January 1, 2026, the IRS’ efforts to expand the timeline for qualifying estates to elect federal estate tax portability is welcome news and provides additional time for the estate’s surviving spouse/executor to gather information and consider market and economic factors in conjunction with opportunities to plan for the anticipated decrease to the estate tax exemption.
If you have questions on this or other estate planning and wealth tax matters, please contact your Opportunity Advisor or Email | Call: 804.747.0000. We can advise you on strategic estate tax savings and planning opportunities that best fit your unique needs.
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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.