Estate Planning Update: Portability Filing Relief

Originally Published June 2017, Updated July 2022

The original version of this article described the extension of the portability election filing deadline, allowing up to two years following the death of a spouse. Recently, the IRS extended the portability election filing deadline again, this time to five years. This extended deadline makes it easier for a surviving spouse to take advantage of a deceased spouse’s unused exclusion amount, possibly reducing or even eliminating future federal estate taxes for some estates.

The exclusion amount referenced in the original 2017 article was $5.5 million per taxpayer; in 2022, it is $12.06 million per taxpayer. Per the Tax Cut and Jobs Act of 2017 (TCJA), this amount will revert to pre-TCJA levels on January 1, 2026, potentially making the portability election relevant to taxpayers with smaller estates. Read more about the TCJA’s impact on estate tax exclusion amounts here. 

The modern federal estate tax, sometimes called the “death tax,” was enacted in 1916. Since then, 2010 remains the only year that the U.S. has not had an estate tax in place. Fast forward to 2017. Although President Trump has suggested that he would like to eliminate the estate tax as part of his larger tax plan, the tax is still on the books. Currently, the estate tax applies to individual taxable estates larger than $5.49 million and to joint taxable estates larger than $10.98 million (The “taxable estate” is the total estate minus amounts passing to charity or to a spouse.). The portions of estates exceeding these exempt amount thresholds are taxed at a 40% federal rate (down from a high of 55%, but higher than the 35% rate that applied in 2012). While the estate tax remains intact for the time being, taxpayers received some relief this month when the IRS issued Revenue Ruling 2017-34. This ruling makes it easier for a surviving spouse to take advantage of his or her deceased spouse’s unused exemption amount, possibly reducing or even eliminating federal estate taxes for some estates.

History

The technical term for the unused spousal estate exemption is the deceased spousal unused exclusion amount (DSUE). Married couples are able to avoid estate taxes at the first spouse’s death via an unlimited marital deduction. However, prior to 2010, if proper estate planning had not been done, a couple’s estate would lose the unused exemption of the first spouse to die when the second spouse passed away. As a result, many more estate assets were subject to estate taxes at the death of the surviving spouse, and a couple’s beneficiaries received fewer assets. In order to take advantage of a spouse’s unused exemption amount, taxpayers often needed to craft estate plans that would establish special trusts (more commonly called credit shelter trusts) designed to utilize and shelter the first-to-die’s exemption amount.

The Act of 2010 (and subsequent American Taxpayer Relief Act of 2012) simplified things dramatically, or so it seemed, by making one spouse’s unused exemption amount portable to the other spouse. The portability concept enabled taxpayers to use their deceased spouses’ unused exemption amount PLUS their own exemption amounts, thereby reducing the amount of estate assets subject to estate taxes at their own deaths. Furthermore, the Act allowed executors to make an election on estate tax returns to claim DSUEs without needing to have previously created, funded and administered a trust. Simple as that—just check the portability election box and file the estate tax return on time…no trust or trust administration necessary.

However, in practice, many executors remained unaware that an estate tax return needed to be filed with this election in order to claim portability. Even more surprisingly, some professional advisors told surviving spouses and their executors not to file—that estate tax returns were unnecessary for estates less than $5 million, because due to the exemption amount, no taxes were due. Many widows and widowers lost their very valuable DSUE for not filing or for not filing on time.

As a result, many surviving spouses petitioned the IRS to allow a late portability election. Who could blame them? Without portability, an additional $5,000,000 of assets may be included in a surviving spouse’s estate. It is no wonder the IRS was inundated with late estate tax return filing requests.

Recent IRS Revenue Ruling

The recent revenue ruling provides relief to estates of decedents who died after December 31, 2010, for which no estate tax was due and none was filed. For example, in 2011 a joint estate totaling $8,000,000 was not required to file an estate tax return, because at that time, a married couple’s combined estate tax exemption amount was $10,000,000. However, while no estate tax return was required for estate tax purposes, a return should have been filed to claim portability so that the DSUE could be used at the surviving spouse’s death. Without this election, the surviving spouse will pay a significantly higher estate tax bill and his/her beneficiaries will receive a much smaller inheritance.

The new procedure allows estates to make late portability elections until January 2, 2018, or up to two years after a decedent’s death, whichever is later. So, in effect, after January 2, 2018, estates will be allowed to claim portability up to two years after a decedent’s death.

Summary

The recent IRS ruling has made it easier for taxpayers to take advantage of their deceased spouses’ unused estate exemption amount by providing executors with more time to claim a portability election. Previously, the portability election was due along with the estate tax return—nine months after the decedent’s date of death. Now, executors can claim the portability election up to two years after a decedent’s death.

We have addressed one small area of estate planning. There are many more estate planning tools and strategies that are beyond the scope of this estate planning update. Asset titling, beneficiary designations, trusts for minor and adult children, fiduciary appointments, and powers of attorney are a few of these tools, even for those who think they will not have a taxable estate. Proper planning can make the settling of your estate simpler, less expensive and unambiguous for your loved ones. Please let us know if you would like to discuss how Bragg Financial Advisors can help you coordinate your estate planning with your portfolio management and financial planning.

This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.