Estate Tax Portability for Surviving Spouses

By Atty. Alicia Bernards

If you lost your spouse in the last few years and have an estate size in excess of a few million or so, be sure you aren’t leaving significant estate tax savings on the table by missing the deadline to file for portability.

A surviving spouse can typically elect to add their spouse’s unused lifetime exemption from federal gift and estate tax to their own lifetime exemption providing significant estate tax benefits.  Fortunately for surviving spouses, the Internal Revenue Service extended the deadline for this election in 2022 to five years from the deceased spouse’s date of death.^[1]  This extended deadline provides the opportunity for surviving spouses who did not previously elect portability to  plan ahead and minimize estate taxes owed by their estate.

What is Portability and How Does It Work?

Portability is the ability for a surviving spouses to add the unused portion of their deceased spouse’s federal gift and estate tax lifetime exemption to their own to their own lifetime exemption by making an election on a timely filed Estate (and Generation-Skipping Transfer) Tax Return (Estate Tax Return).^[2]

Discussing this election with a qualified estate planning attorney is very important as there are strict deadlines for timely filing and every dollar transferred that exceeds an individual’s lifetime exemption is currently subject to estate tax at a rate of 40%.

Example: John and Debra are a married couple.  John dies first, leaving everything to Debra. Assume that when Debra dies in 2026, her gross taxable estate is $12,000,000.  Debra did not elect portability of John’s unused lifetime exemption and her lifetime exemption is $6,000,000.  Because Debra’s estate exceeds her lifetime exemption by $6,000,000., her estate could owe estate taxes totaling $2,400,000 (40% of $6,000,000).

Fortunately, due to the Marital Deduction which allows for unlimited transfers to a spouse, the amount of unused lifetime exemption that can be transferred to a surviving spouse is often substantial.  By making a portability election, a surviving spouse may be able to substantially reduce or eliminate the amount of estate tax owed by their estate.

Example: John and Debra are a married couple.  John died in 2021 with a lifetime exemption of $11,700,000.  Debra timely files an Estate Tax Return to elect to add John’s unused lifetime exemption to her own.  When Debra dies in 2026, her total lifetime exemption is now $17,700,000 (John’s $11,700,000 + Debra’s $6,000,000^[2]).  Because Debra’s gross taxable estate does not exceed her total lifetime exemption, her estate will not owe any estate tax. By electing portability – Debra saved $2,400,000 which can be passed to her loved ones.

Standard Deadline for Filing an Estate Tax Return

Whenever possible, it is recommended that a surviving spouse file an Estate Tax Return to elect spousal portability by the standard filing deadline set forth by the Internal Revenue Code.  By adhering to the standard deadline, it is easier for the surviving spouse to obtain the necessary documentation and substantiation required for the Estate Tax Return.

The standard deadline for an Estate Tax Return is nine months of the deceased spouse’s date of death.  An automatic six-month extension is available if requested before the nine-month deadline.

Extended Deadline for Spousal Portability Election

On July 8, 2022, the Internal Revenue Service issued Revenue Procedure 2022-32 revising the special rule for surviving spouses filing an Estate Tax Return to elect spousal portability.  Under the new Revenue Procedure, the deadline for a surviving spouse to elect spousal portability by filing an Estate Tax Return was extended from two to five years from the deceased spouse’s death.

This extended deadline only applies if the deceased spouse’s estate is not otherwise required to file an Estate Tax Return and no Estate Tax Return was previously filed.  Additionally, the deceased spouse must have been either a citizen or resident of the United States on the date of their death.

What To Do Now

If you have lost your spouse in the last five years and did not file an Estate Tax Return, it is important that you reach out to a qualified estate planning attorney to discuss your options and whether filing an Estate Tax Return make sense for your situation.

If have questions about filing an Estate Tax Return, spousal portability, or other matters related to administering your spouse’s estate, please feel welcome to contact us to schedule a meeting.

Sources:

https://www.irs.gov/pub/irs-drop/rp-22-32.pdf - Rev Proc. 2022-32

https://www.law.cornell.edu/uscode/text/26/2010#c - Sec. 2010(c) (5)(A)

26 U.S.C. § 6075(a); 26 C.F.R. § 20.2010-2(a)(1) – 9 month deadline

26 U.S.C. § 6081(b); 26 C.F.R. § 20.6081-1(b) – 6 month extension

^[1] This article does not provide legal advice and should not be construed as a legal opinion. Each person’s individual situation should be evaluated individually based on rules in effect at that time before you make any decisions regarding matters discussed in this article.  This article is for illustrative and conversational purposes only.

^[2] Estimated amount based on the sunset of the increased Lifetime Exemption from the 2018 Tax Cuts and Jobs Act, which may or may not be modified before the end of 2025.