How Changes to Portability of the Estate Tax Exemption May Impact You
On July 8, 2022, the Internal Revenue Service issued new guidance that allows a deceased person’s estate to elect “portability” of their unused gift and estate tax exemption for up to five years after their death. So, if your spouse passed away less than five years ago, you may be able to file an estate tax return to transfer their unused estate tax exclusion to yourself. More about portabilty is discussed in this article entitled “The Portability of the Estate Tax Exemption” by The Balance
What Is Portability, and How Does One Get It?
Portability is a way of transferring the amount of the gift and estate tax exemption that a deceased spouse did not use to the surviving spouse. It is only available to married couples.
To get the benefit of portability, the executor of an estate must file a federal estate tax return. Previously, this return had to be filed within two years of a person’s date of death, assuming an estate tax return was not required sooner. Because so many estates kept missing this window, the IRS decided to extend it to five years.
Let’s say your spouse has passed away, and you are the executor of their estate. If the total value of your spouse’s assets in their estate is below the threshold for federal estate taxation, you may assume that no estate tax return needs to be filed. While this is technically correct, if you do not file an estate tax return, there is no way to transfer over your spouse’s unused estate tax exclusion for your benefit.
The federal gift and estate tax exclusion as of 2022 is $12.06 million per person ($24.12 million for married couples). A person can give away — either during their lifetime or at death — up to this amount, tax-free.
In the above example, if your spouse’s estate were worth $2 million, that would leave an unused exemption of $10.06 million, which you could add to your own $12.06 million exemption, should you ever need it. But you must file an estate tax return for your spouse and complete the section of Form 706 currently entitled “portability of deceased spousal unused exclusion.”
Now Is a Good Time to Consider If You Could Benefit From Portability
The current federal gift and estate tax exemption will be reduced by half in 2026. So, if you have a spouse who died in the past five years, you should consider as soon as possible whether electing portability makes sense.
To be eligible, the deceased spouse must have been a U.S. citizen or permanent resident on the date of their death, and the executor must not have been otherwise required to file an estate tax return based on the value of the total estate and any taxable gifts. If an estate tax return was filed within nine months after the spouse’s death or an extended filing deadline, the portability option may also not be available.
For families with some wealth, this option could result in hundreds of thousands of dollars or more in tax savings. Many families might not have an estate tax problem now, under the gift and estate tax exclusion of 2022. However, if the second spouse dies after 2026, that spouse’s estate could owe hefty taxes. Portability allows you to plan ahead to avoid this problem.
Large Estates Should Not Rely on Portability
Remember this: portability can often be a fix it” provision depending on your estate tax situation. It is usually better to plan your estate with an “A-B” provision in a testamentary trust, allowing for a estamentary “exemption trust” with a testamentary “marital trust”. This is because for high net worth individuals who risk going over exemption threshholds, a good plan adopted beforehand can remove all future appreciation as well as all future income on the exemption amount from future estate taxes. In other words, the preferred estate tax planning approach is to remove $12.06 from the estate tax, as well as all future income and appreciation on that $12.06 million. You can’t do this with portability unless some of the predeceasing spouse’s exemption is not utilized on that spouse’s estate tax return. For a predeceasing spouse whose estate is not large enough to soak up the entire exemption amount, however, portability is a must.
BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.
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Reference: The Portability of the Estate Tax Exemption