IRS Extends Time to Make Portability Election

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 Settle Estate

Revenue Procedure 2022-32 now grants a surviving spouse more time to elect portability of a deceased spouse’s unused exemption (DSUE). It can now be elected up to five years after the decedent’s date of death instead of the two years given previously. This new guidance is applicable to deaths of first-to-die married decedents who are U.S. citizens or residents and who are not otherwise required to file an estate tax return.

Portability means that 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.

Estates failing to elect portability within the prescribed window could request a private letter ruling, which is 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 the estates of their loved ones 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 A’s Executor or Trustee then makes a portability election and claims the remaining $9,060,000 ($12,060,000 minus $3,000,000) which then ‘ports’ over to their surviving spouse “Spouse B”. 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 means there would be no federal estate tax liability. If portability was not elected when Spouse A passed away, then Spouse B’s estate would now be subject to a 40% tax on $5,940,000 and equal to 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 an estate tax return and electing portability in the event that the exemption threshold drops below their estate value in the future.

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.

Moving Forward

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.”

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.