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By Nancy Burner, Esq.

Nancy Burner, Esq.

What is portability? The word is defined as the ability to be easily moved, but in the context of trusts and estates, it means so much more. In this regard, portability is one of the strongest tools in the planner’s toolbox to reduce or eliminate federal estate taxes after the deaths of a married couple. 

According to federal law, each person has a lifetime estate and gift tax exemption ($12.06 million per person in 2022). As long as the taxable gifts they have paid out during life and at death is under this exemption, no taxes will be owed on the estate at the time of death. While the current exemption is over $24 million, this will sunset for deaths after Dec. 31, 2025.  For any individual death after that date, the exemption will be $5 million, indexed for inflation. Unfortunately, New York State does not allow for portability so other estate tax planning remains necessary.

As an example, take a couple with $14 million total in assets, all held jointly or with the spouse named as beneficiary. The first spouse dies in 2022, the assets all pass over to the survivor and when the survivor dies, all assets will be taxable in that person’s estate. Estate taxes would be owed because the estate is larger than the survivor’s exemption, and if the second spouse dies after Jan. 1, 2026, the tax will be largely based on the reduced exemption amount.

Enter portability to save the day! The IRS allows the surviving spouse to have their own exemption plus any leftover amount of the first to die spouse’s exemption. The first to die spouse’s exemption is portable.  However, this is only available if an estate tax return was filed at the time of the first death and election was made for portability. In our example, since the first spouse passed all assets to the survivor, none of the exemption was utilized. 

If a tax return was filed for the estate and portability was elected, the estate of the survivor will have the applicable exemption amount from the year of death and the $12.06 million exemption from the first death in 2022. That will amount to over $17 million in exemption, thus eliminating all federal estate taxes.

The election to transfer the first deceased spouse’s unused applicable credit amount must be made on a timely filed estate tax return, usually within 9 months of the date of death or the last day of the period covered by an extension. If the tax return is not filed timely, the estate could utilize a simple procedure to obtain an extension to file a late tax return solely for the purpose of electing portability. The caveat is that the estate was not otherwise required to file an estate tax return. If more than 2 years had expired, the estate could ask the IRS for a Private Letter Ruling to obtain permission to file a late estate tax return.  

The good news is that, in July 2022, the IRS amended its regulations to elect “portability” of a deceased spousal unused exclusion amount up to five years after the decedent’s date of death. This is especially relevant with the prospect of the federal applicable credit amount being reduced to $5.0 million (indexed for inflation) after Dec. 31, 2025.  

As an example, the first spouse dies in 2018 and leaves everything to the surviving spouse — which would be tax free and no part of the deceased spouse’s credit was used. Now the surviving spouse has assets of $8.0 million. Since the federal credit is $12.06 million, no tax would be due if the surviving spouse died before December 31, 2025. However, if the surviving spouse dies after that date, there would be a federal tax for any estate assets in excess of $5.0 million (indexed for inflation). 

Under this new amendment, the estate of the first deceased spouse could file for an extension to file a late estate tax return to capture the unused exemption of the first spouse to die. The survivor would have his or her own exemption plus the unused exemption, escaping all federal estate taxes.  

Executors, trustees, or surviving spouses of an individual that died within the past five years should seek advice from a trusts and estates attorney regarding this important change in the regulation. It may be prudent, even in a more modest estate, to file the return and preserve the unused exemption amount as a planning tool for the surviving spouse.

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

Portability refers to the ability of a surviving spouse to make use of a deceased spouse’s unused estate tax exclusion amount.

By Nancy Burner, ESQ.

The estate tax concept known as “portability” is permanent as a result of the enactment of the American Taxpayer Relief Act of 2012. Portability allows a surviving spouse to use a deceased spouse’s unused estate tax exclusion (up to $5.49 million in 2017).

For those dying after Dec. 31, 2011, if a first-to-die spouse has not fully used the federal estate tax exclusion, the unused portion called the Deceased Spousal Unused Exclusion Amount, or DSUE amount, can be transferred or “ported” to the surviving spouse.

Thereafter, for both gift and estate tax purposes, the surviving spouse’s exclusion is the sum of (1) his/her own exclusion (as such amount is inflation adjusted) plus (2) the first-to-die’s ported DSUE amount.

For example: Assume H and W are married, and H dies in 2017. H owns $3 million and W owns $9 million in assets. H has the potential of leaving up to $5.49 million free from federal estate tax to a bypass or credit shelter trust. This would avoid federal estate tax in both spouses’ estates.

However, because H only has $3 million in assets, he does not take full advantage of the entire $5.49 million exclusion. Prior to portability, $2.49 million of H’s exclusion would have been wasted. With portability, his remaining $2.49 million exclusion can be saved and passed to W ‘s estate, increasing the amount she can leave her beneficiaries free from federal estate tax. With a 40 percent federal estate tax rate, this would save W’s estate approximately $996,000 in federal estate tax.

With this plan, the estate would also avoid New York State Estate Tax at the husband’s death since the current exclusion is $5.25 million. The assets in this bypass trust would escape federal and New York estate taxation at W’s subsequent death.

In order for the surviving spouse to be able to use the unused exemption, the executor of the first-to-die’s estate must make an election on a timely filed estate tax return. A timely filed return is a return filed within nine months after death or within 15 months after obtaining an automatic extension of time to file from the IRS.

Normally a federal estate tax return is only due if the gross estate plus the amount of any taxable gifts exceeds the applicable exclusion amount (up to $5.49 million in 2017). However, in order to be able to elect portability, a federal estate tax return would have to be filed even if the value of the first-to-die’s estate was below the exclusion amount.

The problem occurs when the first spouse dies and no estate tax return was filed. In that event, the second-to-die spouse could not use the deceased spouse’s unused exemption. In the above example, the second spouse’s estate would have paid an additional $996,000 in federal estate tax if the election was not made. What if the first spouse dies, no estate tax return is filed, and no election was made on a timely basis? Does the surviving spouse lose the exemption?

In June 2017, the IRS issued Revenue Procedure 2017-34. The revenue procedure is a simplified method to be used to make a late portability election. The IRS is making this simplified method available for all eligible estates through Jan. 2, 2018. The IRS is also making the simplified method of this revenue procedure available after Jan. 2, 2018, to estates during the two-year period immediately following the decedent’s date of death.

To be eligible to use the simplified method under the revenue procedure the estate must meet the following criteria:

(1) The decedent: (a) was survived by a spouse; (b) died after Dec. 31, 2010; and (c) was a citizen or resident of the United States on the date of death.

(2) The executor was not required to file an estate tax return based on the value of the gross estate.

(3) The executor did not file an estate tax return within the time required.

(4) The executor either files a complete and properly prepared United States estate (and tax return) on or before the later of Jan. 2, 2018 or the second annual anniversary of the decedent’s date of death.

For those that had spouses pass away after Dec. 31, 2010, portability can be a valuable estate planning tool to save a significant amount of federal estate tax on the death of the second spouse.

If a surviving spouse has assets that are close in value to the current federal exclusion amount, it is important to examine the records of the deceased spouse to make sure that a portability election was made on a timely filed federal estate tax return. If no return was filed, and no estate tax return was required to be filed, based upon this IRS revenue procedure it’s still not too late to elect portability. The surviving spouse must act quickly as the deadline is fast approaching and 2018 will be here before we know it.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.