Additional time to make a late portability (or DSUE) election has just been allowed by the IRS.

What does this mean?

Portability allows a surviving spouse to use a deceased spouse’s unused estate tax exclusion (up to $11.7 million in 2021/$12.06 million in 2022).  To make this election certain procedural steps had to be followed.  Unfortunately, many surviving spouses were not made aware of this valuable tax-saving strategy and missed making the election. To assist surviving spouses, the IRS issued some simplified guidance in 2017 and 2018 allowing for late filing relief if the portability elections were filed within 2 years of death.

Latest 2022 IRS Guidance

In response to a backlog of Taxpayer requests to make the late estate portability election, the IRS has decided that the 2-year relief period was not enough time. If your deceased spouse was not required to file an estate tax return (i.e., because the total estate was under $12 million) and the only reason an estate return would be filed is to make a portability election, the IRS has just expanded the late filing relief to 5 years from the spouse’s date of death. Further, there is no user fee required to make the late election.

What is a portability election?

Under current law in 2022, when a person dies, each person has a lifetime estate/gift exemption of $12,060,000 (this limit is adjusted upward annually).  If the first spouse to die leaves the entire estate to their surviving spouse and the estate amount (after adding back for gifts made) is under the applicable exemption amount, NO estate tax return is required. If no return is filed, generally the estate tax exemption of the first to die is lost. However, the surviving spouse is allowed to make a “portability election” that allows the deceased spouse’s unused exemption amount to be carried over and be claimed by the surviving spouse. In effect, with a timely filed portability election in place (or a late election filed within 5 years), the surviving spouse can avoid estate taxes on nearly $24 million in estate assets!

Example

IF NO PORTABILITY ELECTION:
Husband dies in 2019.   Husbands’ estate (1/2 of joint assets) in 2019 was $9M and all assets were passed to the wife. An estate return was not required as the lifetime exemption amount in 2019 was $11.4 Million.

The wife now owns 100% of the entire estate and her estate is worth $18M.  If the wife were to die in 2022 only $12.06M of her estate would be free from the estate tax and the rest ($18M – $12. 06M = $5.94M ) would be subject to the 40% estate tax (or over $2.376M in estate tax).

IF PORTABILITY ELECTION MADE:

If a portability election is made, the husband’s $11.4 million exemption is given to the wife. If the wife passes away in 2022, her estate exemption amount becomes $23,460,000.   No estate tax would be due.

With the current onerous estate tax rates, making the portability election can be a very valuable strategy to execute.  The latest IRS guidance gives you time to make the late election if it was missed in the last 5 years.

Final thought: absent further legislation, the federal gift and estate tax exemption is slated to revert to pre-2018 levels after 2025. Portability continues, though, for those whose estates will no longer be fully sheltered, so additional planning should be considered.