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Tom Talks Taxes - July 15, 2022
New late election relief for portability of a decedent's unused exclusion amount
When a United States citizen or resident dies, they are subject to a transfer tax on the taxable estate value. For decedents who die during tax year 2022, up to $12.06 million of the taxable estate is excluded from tax. This basic exclusion amount is indexed annually to inflation and is reduced by any taxable gifts made by the decedent during their lifetime.
The Tax Cuts and Jobs Act temporary increase to the basic exclusion amount will expire after tax year 2025. For tax year 2026, the basic exclusion amount will decrease to approximately $6 million, depending on inflation rates. If this decrease in the basic exclusion amount occurs, it will increase the number of estates potentially subject to the estate tax.
The estate and gift tax has an unlimited marital deduction: it allows an individual to transfer an unrestricted amount of assets to their spouse at any time, including at the death of the transferor, free from estate and gift tax. Any assets transferred to the surviving spouse are generally included in their taxable estate upon death.
For individuals who die after December 31, 2010, a decedent’s estate can elect to transfer the deceased spousal unused exclusion amount (DSUE) to the surviving spouse. This is generally called a “portability” election. Making the election allows the surviving spouse to substantially increase the assets exempt from the estate tax upon the surviving spouse's death.
A decedent does not have to file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, if they are not subject to the estate tax; however, to make the portability election, the decedent must prepare Form 706, calculate the DSUE, and timely file Form 706, even if no tax is due.
The DSUE amount is calculated in Part 6 of Form 706:
The estate tax return is due nine months after the decedent’s date of death. An estate can get an automatic six-month extension by filing Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes. Since it is uncommon for an estate to have an estate tax liability, this deadline is often missed, preventing the estate from making the portability election.
Treas. Reg. §301.9100-3 permits extensions of time for regulatory elections if a taxpayer can establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the government. The IRS gave limited automatic relief in Revenue Procedure 2017-34 and allowed the portability election on late-filed estate tax returns. The IRS now offers much more extensive automatic relief in Revenue Procedure 2022-32. If a decedent’s estate does not meet the revenue procedure requirements, it must request a private letter ruling to make a late portability election.
There are three requirements to use Revenue Procedure 2022-32:
The decedent was survived by a spouse, died after December 31, 2010, and was a citizen or resident of the United States on the date of death.
The executor is not required to file an estate tax return under §6018(a) as determined based on the value of the gross estate and adjusted taxable gifts and without regard to the need to file for portability purposes.
The executor did not file an estate tax return within the time required by Treas. Reg. §20.2010-2(a)(1) for filing an estate tax return.
An estate using Revenue Procedure 2022-32 can make a late portability election on Form 706 filed within five years of the decedent’s date of death. Form 706 will be considered complete and properly prepared if it is prepared in accordance with Treas. Reg. §20.2010-2(a)(7).
The executor filing Form 706 on behalf of the decedent’s estate must state at the top of Form 706 that the return is “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).” Relief will not be granted without this statement.
Tax professionals should advise the executor of every estate of the availability of the portability election; however, it is ultimately the executor’s decision whether or not the cost of Form 706 filing makes sense compared to the potential estate tax reduction from the DSUE. Due to the relatively large basic exclusion amount under current law, most surviving spouses will not need the DSUE to avoid federal estate tax.
However, with a much lower basic exclusion amount potentially around the corner in tax year 2026, the DSUE portability election will be necessary for more estates. I take the “better safe than sorry” position and recommend that every estate file Form 706 to make the portability election.
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