The estate tax concept tax 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 $11.4 million in 2020/$11.7 million in 2021).
For those dying after December 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 2020. H owns $5 million in assets and W owns $6 million in assets. H has the potential of leaving up to $11.4 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 $5 million in assets, he does not take full advantage of the entire $11.4 million exclusion. Prior to portability, $6.4 million of the H’s exclusion would have been wasted. With portability, his remaining exclusion can be saved and passed to W ‘s estate, increasing the amount she can leave her beneficiaries free from federal estate tax. Moreover, this can be done without using a credit shelter trust and instead leaving all assets to the surviving spouse. This may not seem so important for federal estate tax purposes when both spouses can leave $11.4 million apiece, but the historically high exemption amount is set to sunset back to 2017 levels on January 1, 2026 and there is talk of decreasing the exemption as early as 2022.
However, NYS does not have portability, so using a credit shelter trust is crucial to avoid the New York State Estate Tax at the surviving spouse’s death. The NYS exclusion in 2020 is $5.85 million -the assets in this bypass trust would escape Federal and New York estate taxation at W’s subsequent death. If a credit shelter trust was not utilized and all the H’s assets were left to W, she would have at least an $11 million estate when she passed away.
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 fifteen 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. 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 federal 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 January 2, 2018. The IRS is also making the simplified method of this revenue procedure available after January 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 December 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; and
(4) The executor either files a complete and properly prepared United States Estate (and Tax Return, on or before the later of January 2, 2018, or the second annual anniversary of the decedent’s date of death.
For those that had spouses pass away after December 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.