IRS Announces Special Extension for Portability Election: Increases From 2 to 5 Years

››The Internal Revenue Service recently issued Rev. Proc. 2022-32, which permits certain estates up to 5 years to file a federal estate tax return (Form 706) in order to make a portability election and thereby transfer a decedent’s unused estate tax exemption to his or her surviving spouse; an estate that has missed the new 5-year deadline will need to request a private letter ruling from the IRS to make a late portability election.  Previously, the portability election in favor of a surviving spouse was required to be made within 2 years of the decedent’s death. This article describes the new favorable rule and explain why it is more important than ever.

What is the Estate Exemption?

Generally speaking, for 2022, a U.S. person may give away during life or upon death (or a combination thereof) up to $12,060,000 of assets free of gift or estate tax.  This amount is referred to as your exemption amount and is adjusted each year for inflation.  A decedent’s remaining exemption amount on death is referred to as his or her estate tax exemption.  The value of a decedent’s assets that exceeds the estate tax exemption is subject to federal estate tax (currently at a 40% rate).  Note, there is an additional 40% generation-skipping transfer tax imposed on assets passing to donees who are generally 2 or more generations below the decedent (for example, from a grandparent to grandchild or great-grandchild).

What is Portability?

The portability rule, enacted in 2010, allows the transfer of a decedent’s unused estate tax exemption to his or her surviving spouse.  Upon the surviving spouse’s death, he or she may use the deceased spouse’s unused exemption against any potential estate tax. 

A decedent may have an unused exemption because the value of the decedent’s assets is less than the estate tax exemption amount or because a portion of the decedent’s assets is exempt from estate tax exemption under the unlimited estate tax marital deduction or charitable deduction. 

To illustrate the above concepts, assume the Husband dies in 2022 with $30,000,000 of assets and, having made no taxable gifts during life, $12,060,000 of estate tax exemption remaining.  If all of Husband’s assets pass to Wife, then Husband’s estate may transfer Husband’s entire $12,060,000 estate tax exemption to Wife under portability.  With the portability election made, the Wife may utilize the additional $12,060,000 against taxable gifts during her life or against her assets upon her death.  If instead, all of the Husband’s assets were to pass to his children, then the Husband would have no remaining estate tax exemption to transfer to his Wife.

How to Make a Portability Election?

A decedent’s estate must timely file a federal estate tax return to make a portability election and transfer the decedent’s remaining estate tax exemption to the surviving spouse.  A federal estate tax return is due 9 months after the decedent’s death, and the due date may be extended an additional 6 months. 

This is the case even if there was no requirement to file a federal estate tax return or if there was no estate tax due.  Generally speaking, a federal estate tax return is required to be filed if the value of the estate assets exceeds the estate tax exemption amount in effect in the year of the decedent’s death.  So, in the example above, Husband’s estate must file an estate tax return because his $30,000,000 of assets exceeds the $12,060,000 estate tax exemption amount for 2022, although no estate tax is due.  However, if the Husband had died owning $5,000,000 of assets, his estate would have no requirement to file an estate tax return.

What if you Fail to File a Timely Estate Tax Return?

Many estates below the filing threshold do not file a federal estate tax return to elect portability, and the decedent’s unused estate tax exemption is therefore lost.  Since portability was enacted in 2010, a common situation began to occur: a surviving spouse would be advised he or she could benefit from the deceased spouse’s unused exemption amount, but the time had passed to timely a federal estate tax return.  For several years, the only solution was to request a private letter ruling from the IRS granting the decedent’s estate an extension to file a return and elect portability, which was an expensive and lengthy process.  The IRS became inundated with these private letter ruling requests.

In 2017, the IRS issued Rev. Proc. 2017-34, which gave estates with no estate tax return filing requirement (i.e., the value of the estate assets was less than the estate tax exemption) 2 years after the decedent’s death to file a return to elect portability, negating the need in many cases to seek a private letter ruling.  The IRS recently issued Rev. Proc. 2022-32, which now grants these estates 5 years to file a federal estate tax return.

It is important to note that the estate tax exemption amount, which was doubled under the Tax Cuts and Jobs Act, is set to be reduced by one-half on January 1, 2026.  This increases the likelihood of federal estate tax owing upon the surviving spouse’s death, so the value of a portability election is even greater.

Chris Weeg advises clients on making portability elections and other estate and tax planning considerations.  Please contact Mr. Weeg and the estate planners at the firm toll-free at 800-226-1484 or 561-626-2101.