One of most frequently overlooked tools in your estate planning arsenal is the portability election.
Estate portability elections stem from Sec. 2010(c)(5)(A), which provides that a deceased spousal unused exclusion (DSUE) amount becomes available to a surviving spouse’s subsequent transfers during life and at death but only if the executor of the decedent’s estate timely files Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.
Regs. Sec. 20.2010-2(a)(1) establishes the requirements for a timely filed portability election and provides that the due date of an estate tax return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been obtained. After Form 706 is timely filed, the portability election is automatically made for estates required to file, unless affirmatively stated otherwise by the estate’s executor on the return. Once made, the election is irrevocable. An estate’s executor is required to file an estate tax return in all cases where the gross estate exceeds the basic exclusion amount in effect under Sec. 2010(c), which for 2023 is $12,920,000 (see Sec. 6018(a)).
On July 8, 2022, the IRS released Rev. Proc. 2022-32, which updates and expands the simplified method for estates to obtain an extension of time to make a portability election under Sec. 2010(c) (5)(A). The revenue procedure became effective the day it was released, supersedes Rev. Proc. 2017-34, and allows estates with no filing requirement under Sec. 6018(a) to obtain an extension to make a portability election up until the fifth anniversary of a decedent’s date of death, subject to certain requirements.
Therefore, in today’s world, with the 2023 estate and gift tax exemption at $12,920,000 per individual and $25,840,000 for married couples, many executors aren’t required to file an initial estate income tax return upon the death of a spouse.
However, not filing Form 706 deprives the surviving spouse of the portability election, while filing the return guarantees that election. And the tax consequences can be significant – especially if Congress does not extend the provision in 2017’s Tax Cuts and Jobs Act (TCJA) which essentially doubled the estate exemption, beyond 2025, at the end of which the exemption is set to revert to 2017’s $7,000,000 per individual limit (adjusted for inflation).
Here’s an example of how the portability election can make a difference:
Joseph and Elizabeth were married, were named in each other’s will as executor of their spouse’s estate, and shared the following assets:
| Asset | 2020 Value | Joseph | Elizabeth |
| Personal Residence | $500,000 | $250,000 | $250,000 |
| Farmland (5,000 acres) | $11,600,000 | $5,800,000 | $5,800,000 |
| Investments | $1,500,000 | $750,000 | $750,000 |
| Total Estate Assets 2020 | $13,600,000 | $6,800,000 | $6,800,000 |
Joseph died in 2020, leaving his estate to his wife, Elizabeth, and trusting her to look after their children’s needs. Since his estate was less than his estate exemption, she didn’t file Form 706, and inherited Joseph’s assets tax free, under the “Bequests to Surviving Spouses” deduction on jointly held property. Using this deduction has the virtue of bypassing Joseph’s estate exemption for 2020 entirely – which would have left that entire amount available for Elizabeth to add to her own estate exemption at her death, had she filed Form 706 and elected portability.
We will assume that Elizabeth spent all the income derived from her husband’s estate and her own assets in 2021 and 2022, and that the assets did not appreciate.
Since Elizabeth didn’t claim the portability election on Joseph’s estate, here’s the picture at her death in 2022:
| Elizabeth’s Estate 2022 | $13,600,000 |
| 2022 Estate Exemption | $12,060,000 |
| Taxable Estate | $1,540,000 |
| Estate Tax Rate | 40% |
| 2022 Estate Taxes | $616,000 |
Now, if Elizabeth had filed Form 706 for Joseph’s estate in 2020, and elected portability, the picture would be very different, since Elizabeth inherited Joseph’s estate without tax consequences and his 2020 estate exemption was not implicated:
| Joseph’s Estate 2020 | $6,800,000 |
| Bequest to Surviving Spouse | $6,800,000 |
| Net Estate | $0 |
| 2020 Estate Exemption | $11,580,000 |
| 2020 Exemption Applicable | $0 |
| 2020 Exemption Available to Port to Elizabeth | $11,580,000 |
| Elizabeth’s Estate 2022 | $13,600,000 |
| 2022 Estate Exemption | $12,060,000 |
| Joseph’s 2020 Exemption Ported to Elizabeth | $11,580,000 |
| Elizabeth’s Total Estate Exemption 2022 | $23,640,000 |
| Elizabeth’s Taxable Estate 2022 | $0 |
One form filed, one portability election made, and the difference is over $600,000 in estate tax liabilities.
The moral is, file Form 706, and elect portability. Whatever the size of the estate.
Estate planning is a deeply personal matter and can easily become overwhelming what with all the financial details and the emotions that arise when contemplating the end of our days. We understand this. Come consult with our advisors, and let our caring experts guide you through a plan to protect your hard-earned assets for your loved ones – one which aligns with your individual situation.
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Until next time –
Peace,
Eric
