The Expanded Portability for Estate Tax Exclusion

Recently we have filed several estate tax returns to take advantage of the portability of a deceased spouse’s unused exclusion (DSUE). The gift and estate lifetime exemption is $12.06 million in 2022 for each taxpayer. That means that a married couple will not pay tax on $24.12 million in 2022. Assuming no legislation is introduced, this amount will be halved starting on January 1, 2026.

The estate’s executor can elect to transfer the DSUE of the first spouse to die to the surviving spouse by the timely filing of an estate tax return form 706. Note that an estate tax return is not required if the value of the estate on date of death (DOD) is less than the lifetime exemption amount of $12.06 million in 2022. This is when the decision of portability must be considered by the executor and their advisors.

The preparation of an estate tax return is not an insignificant task. All the decedent’s assets must be valued — and precisely — if an estate tax return is required. If one is not required, there is considerable work to get reasonable values in place to file for portability purposes. If an executor is filing an estate tax return solely for the purpose of transferring the DSUE, it is not necessary to report the value of assets that qualify for the marital deduction, i.e., that are transferring to the surviving spouse in some form. Nor is it required to value and report assets that qualify for an estate charitable deduction. Utilizing the simplified version still requires considerable and careful attention and work. All that is to say, an estate tax return form 706 is going to be a considerable expense that the executor will not take lightly. Certainly, filing to preserve a $12.06 million shelter from estate tax is well worth it for wealthy taxpayers.

The filing deadline for a form 706 is nine months from the DOD, and a six-month extension can be granted. If estate tax is due, it must be paid with the extension to avoid failure-to-pay penalties. If filing only for portability of the DSUE, the initial filing deadline was the same under the old rules. The IRS provided and granted an extension to two years from DOD for estates filing only for portability in a revenue procedure prior to Rev. Proc. 22.32, which makes the extension process much simpler: The executor must file form 706 and elect portability on or before the fifth annual anniversary of the decedent’s date of death.

This will provide an opportunity for those estates that have not filed an estate tax return for portability of the DSUE to review their options and file, assuming they are within the five-year window. It is important to note that, should the gift and estate lifetime exemption be halved on January 1, 2026, the DSUE that was transferred to the surviving spouse will be preserved. The IRS instituted anti-clawback regulations that preserve the DSUE transferred as the result of the portability election, i.e., filing form 706 within the proper time frame and in the form required by the tax laws.

Your advisor will work with you if, and when, this is applicable to you. If you have any questions, feel free to contact your advisor or tax specialist.

Larry HarrisLarry Harris, CPA, CFP®, PFS
Co-Director of Tax Services

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