The Internal Revenue Service (IRS) recently extended the time to elect portability of the deceased spousal unused exclusion (DSUE) amount for estates not otherwise required to file an estate tax return. After getting swamped with extension requests from taxpayers who missed the two-year deadline, the IRS announced that it would allow five years to make a late claim on portability. Read on to learn more about this change and how it applies to your estate planning clients.
What Is Portability?
Portability allows a surviving spouse to add the unused estate tax exemption amount of their deceased spouse to their own exemption amount. Currently, individual taxpayers have a $12.06 million estate tax exemption; the exemption amount changes annually. Estate planners are preparing for this number to be cut in half at the end of 2025 when the Tax Cuts and Jobs Act of 2017 expires. Therefore, portability may be a useful estate planning tool to help increase the available exemption amount upon the death of a surviving spouse while the exemption amount is high.
Portability Election Timelines
Portability of the DSUE is elected via an estate tax return, IRS Form 706. Form 706 is required to be filed for an estate that exceeds the federal estate tax exemption threshold, while Form 706 may be filed for purposes of electing portability for estates that are less than the estate tax exemption amount. Estate representatives generally had fifteen months to file Form 706: nine months after the first spouse’s death, followed by an automatic six-month extension upon request.
Estate representatives who missed the fifteen-month deadline but wanted to elect portability would have to ask the IRS for a private letter ruling (PLR) to obtain an extension of time to file. An abundance of PLR extension requests led the IRS to offer a two-year extension in 2017; a continued abundance of requests led to the current five-year extension. This means that estate representatives planning to file a Form 706 for purposes of portability only can now file Form 706 within five years of the date of death without petitioning the IRS for a PLR.
Here is an example of portability in action: Madeline used $6 million of her $12 million exemption before she died, leaving a DSUE amount of $6 million. If her husband, Fred, elects portability, Fred “ports” that $6 million to himself, and it gets added to whatever the exemption amount is when Fred dies. Let’s say, at the time of his death, Fred has a $10 million taxable estate, and the exemption amount has come down to $6 million. Without portability, $4 million of Fred’s estate is potentially exposed to estate tax. But, if Fred elected portability upon Madeline’s death, he would have a combined exemption of $6 million (the federal exemption amount at the time of Fred’s death) + $6 million (the ported DSUE) = $12 million, thereby shielding his entire estate from estate tax liability.
This late relief only applies to voluntary filings for the election of portability; it does NOT apply to estates that are otherwise required to file a Form 706. This change in IRS policy gives executors and their attorneys more time to consider whether portability would be useful.
Also note that portability does not apply to the generation-skipping transfer tax, and portability does not account for the appreciation of assets in the estate of the surviving spouse.
In addition, some states impose estate taxes, but few offer portability of state-level exemptions.