Roopa Srikanth, CPA-Houston
The IRS issued Rev. Proc. 2022-32 on July 8, 2022 to provide relief for election of portability of a deceased spouse to be elected in five years instead of two years. The two-year relief was previously provided by Rev. Proc. 2017-34.
Since Dec. 31, 2010, the estate tax lifetime exemption that is unused by the deceased spouse can be elected to be transferred to the surviving spouse by filing Form 706, United States Estate (and Generation-Skipping Transfer) return.
Such a relief is only available if the decedent:
- was survived by a spouse;
- died after Dec. 31, 2010; and
- was a citizen or resident of the U.S. on the date of death.
For example, if in 2022 a deceased spouse had assets worth $7.5 million, the executor or administrator of the deceased taxpayer can file the Form 706 and make a portability election. Since the estate tax exemption in 2022 is $12.06 million, the surviving spouse will get to add $12.06 million - $7.5 million = $4.56 million to their lifetime estate tax exemption.
Such an exemption can be utilized by the surviving spouse in making taxable gifts during the lifetime or upon death. If used for making gifts, the deceased spouse estate tax exemption that was added will be utilized first before the surviving spouse lifetime exemption.
The relief provided by the IRS becomes important now more than ever since the current estate and gift tax exemption is scheduled to sunset along with a slew of other Tax Cuts & Jobs Act (TCJA) provisions by Dec. 31, 2025. The lifetime exemption for estates and gifts is supposed to go back to pre-TCJA exemption limits of $5 million cap, which adjusted for inflation will be around $6.2 million.
This sunset provision makes the portability election very attractive. But one must bear in mind that the portability election does not happen automatically and that the Form 706 has to be filed. Though the Form 706 is much simpler for the portability election estate returns, it is not always practical if the surviving spouse was not actively involved in the financial planning and was not aware of all the assets the deceased spouse had or if there are stepchildren and multiple marriages involved. There can also be the scenario where a surviving spouse might not be aware of the portability election.
We should also consider the present high rate of inflation and the bear market, where stocks and other investments are losing value and are likely to continue to do so for a while, potentially eroding the assets that the surviving spouse inherits. It is imperative to take into consideration the age and lifestyle of the surviving spouse, as well.
Considering all these factors, a five-year relief to elect portability is a very attractive option. Generally, a taxable estate must file the estate tax return within nine months of the death of the taxpayer or can get an additional six-month extension. This five-year relief is available only for a non-taxable estate and the election can be made on or before the fifth anniversary of the decedent’s date of death. If making the portability election, the Form 706 should state “filed pursuant to Rev. Proc. 2022-32 to elect portability under Sec. 2010(c)(5)(A)” on the top of the first page.
(Roopa Srikanth, CPA, is Tax Manager at Carr, Riggs & Ingram, Houston and can be reached at firstname.lastname@example.org.)