IRS Modifies Portability Election Rule

Overview

With the increase in the exemption equivalent of the unified credit to $12.06 million per person for deaths in 2022, very few estates have any federal estate tax liability.  That means it is often the case that there is a “leftover” (unused) exemption amount at death.  Normally, that unused amount would simply be lost.  However, starting in 2011, upon the death of the first to die of a married couple the estate of the first spouse to die can elect to “port” (transfer) the unused exclusion amount to the surviving spouse.  The amount ported over is added to the existing exclusion amount of the surviving spouse for the surviving spouse to use to either offset lifetime gifts (the federal estate tax and gift tax are “coupled”) or offset estate tax at death. 

Often, the amount ported over is the full $12.06 million that can be ported to the surviving spouse, either because the estate was unplanned and everything automatically passes to the surviving spouse (and is covered by the marital deduction), or because the first spouse’s estate has been intentionally planned with that result in mind.  But, sometimes there are larger estates where some of the first-spouse’s exemption is used to offset federal estates tax.  The unused balance can be ported to the surviving spouse and added to the surviving spouse’s exemption.

But the “porting” of the deceased spouse’s unused exclusion amount (DSUEA) is not automatic.  As indicated above, an election must be made in the deceased spouse’s estate to transfer the DSUEA to the surviving spouse.  The timeframe for making the portability election had been two years from the date of the first spouse’s death.  Now, the IRS has changed that two-year timeframe to five.

The IRS modification of the timeframe for filing a portability election – it’s the topic of today’s post.

The DSUEA Election

Two-year rule.  The Treasury Regulations set the rules for making the DSUEA portability election.  The executor of the estate of the first spouse to die must make the election on a timely-filed federal estate tax return (Form 706).  Treas. Reg. §20.2010-2(a).  To make the election, the deceased spouse must be a U.S. citizen or resident as of the date of death; a federal estate tax return is not required to be filed (because the estate is not large enough to have federal estate tax liability); and no federal estate tax return was filed.  If no Form 706 is filed, the portability election cannot be made.  Treas. Reg. §20.2010(a)(3).  For larger estates that trigger an estate tax liability and the filing of Form 706, any unused DSUEA is automatically ported to the surviving spouse.

As for the portability election, “timely-filed” means nine months after death or, by extension, 15 months after death.  The IRS can grant extensions of time from those deadlines and has done so on numerous occasions by issuing private letter rulings.  Indeed, the IRS grew weary of granting so many extensions that it issued Rev. Proc. 2017-34 in 2017 providing a simplified method for estates to get an automatic extension of time to make the portability election.  2017-26, I.R.B. 1282. With Rev. Proc. 2017-34, the IRS also granted an automatic two-year “grace” period to make the portability election – two years from the date of the decedent’s death.

Note:  If a portability election is not desired upon the death of the first spouse, the executor must state affirmatively on a timely filed Form 706 (or attachment) that the estate is not electing portability under I.R.C. §20.10(c)(5).  For larger estates where there is a Form 706 filing requirement, a box on part 6, section A of Form 706 can be checked if the executor does not want to port over the DSUEA. 

Five-year rule.  Even with the two-year “grace” period provided in Rev. Proc. 2017-34, the IRS still received many requests for an extension of time to make the election.  Those requests, coupled with the shortage of IRS personnel in the Estate and Gift Tax branch has led IRS to supersede Rev. Proc. 2017-34 with Rev. Proc. 2022-32, 2022-30 I.R.B. ___.   Under Rev. Proc. 2022-32, the timeframe for making the portability election is extended to five years from the date of the decedent’s death.  Rev. Proc. 2022-32 is effective for estates of decedents dying on or after July 8, 2022. 

Note:  It continues to be the case that the Form 706 that is filed to make the DSUEA election for a non-taxable estate is a simplified Form 706.  There is no need for any appraisals, and amounts can be rounded down to the nearest $250,000.   Also, the requirement for making the electing referenced above that were contained in Rev. Proc. 2017-34 remain unchanged. 

Conclusion

The DSUEA election is an important part of estate planning for a surviving spouse.  While the federal estate tax exclusion amount is schedule to drop to $5 million (adjusted for inflation in 2011 dollars) for deaths after 2025, any amount ported over presently would remain.  That could be a big deal for a surviving spouse with a sizable estate that dies in a year when the applicable exclusion amount is lower than it is now.  It can also be important when a surviving spouse comes into unexpected wealth that substantially increases the size of the taxable estate.  In any event, the DSUEA portability election is an election that should be made in practically every estate of the first spouse to die of a married couple.  While it may ultimately prove to have been unnecessary, it is always better to be safe than sorry.  Now, IRS has provided a five-year period from the death of the first spouse to make the election.  That’s good news for many estates, farm and non-farm.