IRS Has Extended the Ability to File a Late Portability Election

Filing an IRS Form 706 for portability is an important aspect of estate planning that can have significant consequences for your beneficiaries. Portability refers to the ability to transfer any unused estate tax exemption from a deceased spouse to the surviving spouse. This can be an invaluable tool for married couples looking to maximize the amount of assets they can pass on to their heirs without incurring estate taxes.

The IRS Form 706 is the federal estate tax return form that must be filed after a person’s death if their estate exceeds the applicable exclusion amount. In addition to calculating the estate tax owed, Form 706 is also used to determine whether any unused exemption can be transferred to the surviving spouse.

The importance of filing Form 706 for portability cannot be overstated. If the form is not filed, any unused exemption from the deceased spouse is lost, which could result in the surviving spouse having to pay significantly higher estate taxes upon their death. For example, if a married couple has a combined estate of $12 million, and the first spouse to die leaves all of their assets to the surviving spouse, but no Form 706 is filed for portability, the surviving spouse would only have a $6 million exemption to use upon their death. This means that $6 million of their estate would be subject to estate taxes, resulting in a significant tax bill for their heirs.

On the other hand, if Form 706 is filed for portability, the surviving spouse would be able to take advantage of the unused exemption of the deceased spouse, effectively doubling their own exemption to $12 million. This would result in a significant tax savings for their heirs and could allow them to pass on more assets to future generations.

Filing Form 706 for portability can also provide flexibility in estate planning. For example, if a married couple has significant assets, but one spouse is in poor health, they may want to transfer as much of their assets as possible to the healthier spouse in order to maximize their estate tax exemption. By filing Form 706 for portability, any unused exemption from the deceased spouse can be transferred to the surviving spouse, allowing them to pass on more assets to their heirs.

The IRS has now issued a revenue procedure (Rev. Proc. 2022-32) that allows estates to elect “portability” of a deceased spousal unused exclusion (DSUE) amount as much as five years after the decedent’s date of death.

Estates of decedents dying after Dec. 31, 2010, who are survived by a spouse, if not required to file an estate tax return, may do so under Sec. 2010(c)(5)(A) for the sole purpose of passing on the decedent spouse’s DSUE to the surviving spouse, who may add it to his or her own basic exclusion amount under Sec. 2010(c)(2)(B) in calculating an applicable credit amount. The due date of an estate tax return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained).

In conclusion, filing an IRS Form 706 for portability is an essential aspect of estate planning for married couples with significant assets. It can provide significant tax savings for their heirs and offer greater flexibility in estate planning. Failing to file the form can result in the loss of the unused exemption from the deceased spouse, which could lead to a significant tax bill for the surviving spouse and their heirs. If you are unsure whether you need to file Form 706 for portability or have any other questions about estate planning, please contact us at RWC.

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