Under a new IRS ruling, a surviving spouse now has 5 years to make an estate tax portability election. The relevant IRS revenue procedure can be found here: Revenue Procedure 2022-32. The 5 year rule can only be used if an estate tax return isn’t otherwise required to be filed.
What is Estate Tax Portability?
Essentially, each person has an estate tax exemption (an amount that can be passed on to loved ones before the estate becomes subject to an estate tax). When one spouse dies, the surviving spouse can claim the unused estate tax exemption of the first spouse to die. This concept is known as estate tax portability. In order to better understand estate tax portability, I would recommend reading this blog post entitled “Federal Estate Tax Portability“.
It May Not Be Too Late to File for Portability
Originally, the timeframe for filing for portability was quite strict. However, under Treasury Regulation §301.9100-3, the IRS may grant relief. The taxpayer must establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith and that the grant of relief will not prejudice the interests of the government. This rule meant that taxpayers were constantly reaching out to IRS for guidance as to whether an extension was in good faith. Accordingly, the IRS needed a simpler rule.
Pursuant to Revenue Procedure 2022-32, if an estate is not otherwise required to file a Form 706 estate tax return, taxpayers now generally have a five year window in which to make an estate tax portability election. Now, there is no longer the need to prove good faith. (Generally, an executor is required to file a return if an estate is over the federal estate tax exemption threshold (currently $12.06 million). In this situation, the five year rule will NOT apply.)
Should You Make an Estate Tax Portability Election?
This all begs the question – should you file an estate tax return and make an estate tax portability election? After all, it costs time and money to prepare an estate tax return. However, when filing an estate tax return for portability, the return is usually far more simple and does not tax much time. However, if a person passes away, there is a 40% tax to the extent the person’s assets are over the federal estate tax exemption. Accordingly, we strongly believe that you should file for portability if any of the following is true:
- if the surviving spouse’s estate is likely to exceed $3M at any time;
- if you have made significant gifts; or
- if you may inherit money from a relative.
However, as always, please consult an experienced attorney for advice specific to your situation. If you have any questions regarding federal estate tax portability or probate matters, please reach out to Elizabeth C. Ketterson, Esq. Elizabeth is the head of our firm’s estate administration department.
Final Thoughts on Portability
Be careful that portability does not lull you into a false sense of security regarding your estate plan. Again, portability is NOT automatic. The executor must file a timely return. I know that if people are not worried about taxes, they may be less inclined to get the proper documentation in place. This would be particularly worrisome in the event of 2nd marriage situations where the children of a first marriage could potentially be cut out entirely.
