According to Internal Revenue Code (“Code”) Section 6018, if the gross estate of an individual exceeds the basic exclusion amount in effect under Code Section 2010(c), then the executor shall file the Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return (“Form 706”). In 2022, the Code set the basic exclusion amount at $12.06 million. Although a gross estate may not exceed the applicable exclusion amount, the executor may want to file Form 706 for another reason. If the decedent was married at death, then their executor may want to file Form 706 to take advantage of portability.
In 2010, President Barack Obama signed the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act (“TRUIRJCA”) into law introducing the concept of portability, among other things. Portability allows the surviving spouse to take into account the decedent spouse’s Deceased Spousal Unused Exclusion (“DSUE”) amount in addition to their own applicable exclusion either during their lifetime or upon death. The Form 706 TRUIRJCA contained a sunset provision that would have terminated portability at the end of 2012. President Obama changed that and made portability permanent when he signed the American Taxpayer Relief Act into law in early 2013. An executor elected portability by filing a Form 706. An executor has nine months from the date of death with an automatic six-month extension to file the Form 706. If an estate was not required to file Form 706, then the Internal Revenue Service (“IRS”) had the discretion to extend the time for filing Form 706. Executors wishing to ask the IRS to exercise its discretion did so by obtaining a Private Letter Ruling (“PLR”). In part because of the significant amount of PLRs requested in this area, the IRS issued Revenue Procedure 2017-34.
In Revenue Procedure 2017-34, the IRS granted a blanket two-year extension to elect portability to any estate not otherwise required to file a Form 706. Thus, an executor had additional time to file Form 706 for the sole purpose of electing portability. If the executor missed that date, then the executed needed to obtain a PLR to seek portability. Once again, due to the numerous PLR requests for this relief, the IRS issued Revenue Procedure 2022-32 on July 8, 2022. In Revenue Procedure 2022-32 the IRS extended the time during which an executor may file a Form 706 to elect portability from two years to five years without obtaining a PLR. Of note, the executor needs to ensure that Form 706 has the following language at the top of page 1 “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).” This extended time will serve executors well and provides additional time to consider whether it makes sense for a particular estate to file Form 706 for portability. This will become increasingly important for executors of estates with decedents dying before January 1, 2026, at which time the provisions of the Tax Cuts and Jobs Act of 2017 which temporarily doubled the exclusion amount from $5 million to $10 million, as adjusted for inflation, is set to sunset.
Let’s review an example to see how portability works in practice. Assume that Bert and Ernie are married, have a net worth of $30 million, and hold all their assets as tenants by the entirety. If Bert dies leaving his entire applicable exclusion amount of $12 million (note that we assume the 2022 applicable exclusion amount of $12.06 million but rounded down for purposes of this example) unused and his executor fails to take advantage of portability, then his estate will avail itself of the unlimited estate tax marital deduction and have no federal estate tax liability. Clearly, Bert’s estate has suffered no economic loss. Of course, upon Ernie’s death a few years later when the applicable exclusion amount has risen to $13 million, Ernie’s estate will have an estate tax liability of $6.8 million ($30 million taxable estate – $13 million applicable exclusion * .40 tax rate). If, instead, Bert’s executor had elected portability, then Bert’s executor would have filed Form 706 to port Bert’s unused applicable exclusion amount of $12 million. Upon Ernie’s later death, Ernie’s estate would have had an estate tax liability of $2 million ($30 million taxable estate – $12 million DSUE – $13 million applicable exclusion * .40 tax rate). Obviously, portability produced much lower tax liability for Ernie’s estate.
Although portability has many benefits as demonstrated in the example above, it has some pitfalls. First, portability does not apply to the Generation-Skipping Transfer Tax Exemption which allows the transferor to avoid taxation on distributions to the next generation. Second, portability carries over only the applicable exclusion of the decedent upon death and does not account for any appreciation of the assets in the surviving spouse’s estate. Third, most states that impose a state estate tax do not have statutes that allow for the portability of the state estate tax exclusion amount. Finally, planning to use portability generally means that the surviving spouse receives the assets outright, which gives the surviving spouse the opportunity to distribute assets in a way not contemplated by the decedent spouse when the decedent spouse created the plan.
As this article demonstrates, extending the time during which an executor may elect portability gives the executor wide latitude to consider whether portability works best for the estate. The passage of Revenue Procedure 2022-32 provides extra time to an attorney to help clients who had no obligation to file Form 706, but who may have missed the original two-year deadline for electing portability. It’s yet another tool to have that allows a qualified Estate Planning attorney to add value for their clients.
Tereina Stidd, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
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