New Estate Planning Guidance for Electing Late Portability

Although the news has been filled with stories about inflation and rising interest rates, there has been a new change which is good news for many Hamilton taxpayers. In early July, the IRS has extended the timeframe by which qualifying estates can make a portability election. This is an important development for estates of married couples, as they’ll have up to five years after the first spouse’s death to combine both lifetime exclusion amounts. The result is a new opportunity to minimize federal estate and gift tax exposure. To help clients, prospects, and others, Klatzkin has provided a summary of the key details below.

New Five-Year Timeframe to Elect Portability

Portability lets the surviving spouse transfer an unused exclusion amount (also called a deceased spousal unused exclusion amount, or DSUE) from the decedent’s estate to the surviving spouse. In so doing, the couple’s combined exclusion amount – currently $24.12 million – can be used.

The surviving spouse, executor, or other appointed representative can only elect portability on Form 706, the federal estate tax return. The federal filing is due nine months after the date of death. A six-month extension is available, bringing the total length of time to elect portability under normal deadlines to 15 months. Because not all estates are required to file Form 706, portability can be easily missed.

Estates that fail to elect portability within either the 9- or 15-month timeframe may be eligible for a late election.

In 2017, the late portability election had to be made by the two-year anniversary of the first spouse’s death. Now, effective July 8, 2022, that timeframe has been extended to five years.

When the IRS reviewed private letter ruling requests for an extension to elect portability, they found that most requests were for estates of decedents within the past five years. Instead of going through the work of responding to each request, the IRS merely updated previous guidance and extended the portability election.

Portability Requirements

To qualify under revised guidance, the estate must have been valued at less than the filing threshold at the time of death, meaning it wasn’t required to file Form 706. In 2022, that amount for the first spouse is $12.06 million.

Provided an estate tax return was never filed – and wasn’t supposed to be – portability can be an option. A private letter ruling request is unnecessary. Estates need only file an accurate and completed Form 706 with the following language at the top of the return: “Filed Pursuant To Rev. Proc. 2022- 32 To Elect Portability Under § 2010(c)(5)(a).”

The good news does not stop there. The estate of the surviving spouse may still file for the election even if he or she is no longer alive or if federal estate and/or gift taxes have been paid. If all other requirements were met as of the first spouse’s death, the estate may request a credit or refund.

Portability is void if the estate already filed Form 706 or was required to but didn’t. Portability will also be nullified if the IRS later determines that the value of the estate exceeded the filing threshold. Determining an estate’s value can be complicated and it’s important to get the calculations correct, especially with the tax implications of filing for late portability.

Considerations When Valuing an Estate

When the marital deduction will see most assets pass to the surviving spouse anyway, what value is portability?

Estate taxes may escape the decedent, but if the marital deduction is the primary means of estate tax planning, the surviving spouse’s estate will still owe those taxes upon death. Portability ensures the combined exclusion amounts are used to their full extent and can potentially save millions of dollars for high-value estates.

Portability may also be useful if the surviving spouse receives a windfall such as an additional inheritance or lottery winnings,

For the purposes of electing late portability, the gross estate cannot be valued at more than the annual filing threshold, less any allowable deductions.

Because the value of the gross estate encompasses several different types of assets, the valuation approach can vary depending on the asset. For purposes of determining estate tax, the property is inclusive of:

• Cash and securities
• Real estate
• Insurance
• Trusts
• Annuities
• Business interests
• Other assets, like mineral rights

Tangible, intangible, domestic, and international property are all included.

Completed lifetime gifts and property owned solely by the spouse or other individuals are not included.

Further, according to the IRS, when not otherwise required to file Form 706, estates electing portability are “not required to report the value of certain property eligible for the marital deduction under section 2056 or 2056A or the charitable deduction under section 2055. However, the value of those assets must be estimated and included in the total value of the gross estate.”

For the most part, estates are valued as of the date of death except in special elections, described below. For property distributed, sold, exchanged, or otherwise disposed of within six months of the death,  is subject to fair market value as of the date of disposition, transfer, or sale.

Special valuation elections include:

• Alternate valuation: Life estates, remainders, and similar interest values are calculated using the decedent’s age at time of death and the property value on the alternate valuation date.
• Special-use valuation: Used to value closely held business real property and/or certain farm property based on its use value rather than fair market value.

Contact Us

Estate planning for married couples gets a boost with the five-year portability extension. A late portability election could be a valuable estate planning tool, especially considering the federal exclusion amounts are set to be cut in half starting in 2026. If you have questions about the information outlined above or need assistance with an estate planning issue, Klatzkin can help. For additional information call 609-890-9189 or click here to contact us. We look forward to speaking with you soon.

©2022 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.