By Julie L. Cross, Esq.

Each individual has a $12.06 million dollar federal basic exclusion amount (in 2022) which is exempt from federal estate, gift and generation skipping transfer taxes. In addition, each individual may leave an unlimited amount of property free of federal estate and gift taxes to a spouse through the unlimited marital deduction. This defers estate taxes on all property until the death of the surviving spouse. 

Under Sec. 2010(c)(5)(A) estates of decedents dying after December 31, 2010 which are not otherwise required to file an estate tax return, and for which there is a surviving spouse, may file the Federal Estate Tax Return (Form 706) for the purpose of passing on the deceased spouse’s unused estate tax exemption (DSUE) to the surviving spouse. This is commonly referred to as “portability.” 

For example, if the first spouse to die uses only $2.06 million dollars of his or her $12.06 million dollar applicable exclusion amount, then the surviving spouse would have $22.06 million dollars available for the federal exemption, i.e. $12.06 million dollars plus the unused $10 million dollars from the estate of the first spouse to die. Once the total lifetime gifts and the estate exceeds the federal exemption amount, a federal tax, either gift or estate, will be applied at a rate of 40%. 

The original deadline to file for portability was nine months after the date of death with the availability of a six (6) month extension. After numerous late filings, the IRS extended this deadline to two (2) years in 2017. 

The IRS has now extended the timeline for filing for portability to five years after the decedent’s date of death. The IRS reasoned in Rev. Proc 2022-32 that the number of requests for private letter rulings requesting extensions placed a significant burden on IRS resources. The new five year rule applies only to estates not otherwise required to file an estate tax return other than to elect portability.

This new rule is of particular importance with the unknown fate of the Tax Cuts and Jobs Act of 2017 that raised the federal estate tax exemption to $12.06 million (2022). The tax cuts are set to expire on January 1, 2026, at which point the exemption will drop down to around $6 million based on inflation. This means, even if a deceased spouse’s current net worth is well below $12.06 million mark, the surviving spouse should still file the Federal Estate Tax return and elect portability.

For more information, contact Julie L. Cross, Esq. at jlc@spsk.com or 201-262-3962.

DISCLAIMER: This Alert is designed to keep you aware of recent developments in the law. It is not intended to be legal advice, which can only be given after the attorney understands the facts of a particular matter and the goals of the client.