Increased Time to File for Portability for Certain Estates

There is a new change to federal estate planning rules which will be warmly received by Atlanta high net-worth individuals and family offices. The IRS recently released Revenue Procedure 2022-32, which allows certain qualified estates a longer timeframe to elect portability along with a simpler procedure. Previous guidance allowed for late elections for up to two years.

The new guidance takes effect as of July 8, 2022, and the IRS will not issue private letter rulings to qualifying estates, so surviving spouses and estates will need to file for late portability if they qualify. It’s a simpler process that will hopefully be quicker and less time-consuming for estates that qualify. The late portability election doesn’t apply to estates above the filing threshold. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Portability and Estate Planning

Portability is an important tool in the estate tax planning process. Originally introduced in 2010 as a temporary tax measure, portability was made permanent in 2013.

This election allows any unused exclusion amount (deceased spousal unused exclusion amount, or DSUE) to be transferred to the surviving spouse. With the extra exclusion, the surviving spouse has more options to transfer gifts and assets out of his or her estate and thus minimize federal estate and gift taxes. DSUE is combined with the surviving spouse’s exclusion amounts and applies to transfers made during life or at death. In that way, both spouses can use their full lifetime exclusion amounts and better fulfill the decedent’s wishes without unnecessary red tape.

The portability election is made in Part 6 of Form 706, the federal estate tax return. Once elected, the surviving spouse need not do anything else and may begin to use the DSUE as part of his or her estate and gift planning.

This is usually considered to be a simpler, more cost-effective method to minimize estate taxes, especially compared to setting up a bypass trust. Portability isn’t automatic and not every estate qualifies for it, so surviving spouses and executors need to be aware of filing deadlines.

Because not every estate is required to file a federal estate tax return, portability can be easily missed.

New IRS Guidance

Released in July 2022, the new guidance allows certain estates up to five years after the decedent’s death to elect portability. Qualifying estates don’t need to submit any paperwork or fees to claim it; if they previously met filing and reporting requirements and it’s been less than five years since the decedent passed, estates can simply file Form 706 to elect late portability.

There are two examples in the updated Revenue Ruling.

Under the new guidance, the IRS may grant refunds to surviving spouses and estates where gift and estate taxes were incurred that could have been avoided with an earlier portability election. A request must be filed with the IRS provided the statute of limitations hasn’t expired. Under current law, the statute of limitations on credits or refunds is either:

• Two years from the time the tax was paid or
• Three years from the time the return was filed, whichever is later.

If no return was filed, the statute of limitations is two years from when the tax was paid.

Form 706 Deadlines

Meeting filing and reporting deadlines is crucial in estate planning, especially when it comes to portability.

• Within nine months of the decedent’s death, file Form 706 and elect portability.
• If an extension is requested, file Form 4768 on or before the due date for the estate tax return.
  • The extension will grant the estate an additional six months to file a return.

Only estates valued at $12,060,000 or more in 2022 are required to file Form 706, the federal estate tax return – on which portability can be elected. The annual filing threshold changes each year, so surviving spouses and executors who wish to claim late portability will need to check the threshold each year.

Portability might not be the best solution for every situation; for example, if the combined estate value between both spouses won’t exceed the filing threshold, then it may not be necessary. There is extra work involved in calculating the DSUE and the extra work may not be worth it.

Contact Us

The recently published update to portability election rules is certainly welcome news for many Atlanta taxpayers. The extra time to make the election will make it easier for the estate planning process. If you have questions about the information outlined above or need assistance with an estate planning need, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.