IRS Extends Deadline to File for Portability of Estate Tax Exemption Amount

Transcript of Podcast Episode 202

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, IRS Extends Deadline to File for Portability of Estate Tax Exemption Amount.

Federal law allows individuals to pass their assets through lifetime gifts and/or at death to their loved ones without federal estate or gift tax consequences, subject to established limits.  Commonly known as the applicable exclusion amount or estate and gift tax exemption amount; we’ll refer to it as the exemption amount. Depending upon the year, the legislation in effect at the time, and inflation factors, that amount varies. For 2022, the exemption amount is $12.06 million and for 2023, it will be $12.92 million per person.  Married couples can effectively pass over $24 million free of estate and gift taxes.

There aren’t too many couples with that kind of net worth, so most of us haven’t given this much thought. In 2026, however, the exemption amount is scheduled to be cut in half as a result of a “sunset” provision in the Tax Cuts and Jobs Act of 2017. In addition, there were many legislative proposals in 2021 and 2022 to cut the exemption amount down to $3.5 million.  That amount would make this topic much more important and impact many more individuals and families.

Prior to 2011, when the exemption amount was significantly lower than it is today, an individual had to utilize  his or her exemption amount prior to or at the time of death, or else it was no longer available.  It was a “use it or lose it” proposition. But, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted, introducing the concept commonly known as “portability” but officially known as the “deceased spousal unused exemption” or DSUE.

In essence, if a widow or widower died in 2011 or later, he or she could also use his or her decedent spouse’s unused exemption, provided the spouse also died in 2011 or later. The prior spouse’s exemption amount would be carried over by the surviving spouse provided  a federal estate tax return on IRS Form 706 was timely filed at the first death.

When estate taxes are owed, a federal estate tax return is typically required to be filed within nine months of death although an executor can obtain a six-month extension. If the estate is generally not required to file an estate tax return because no estate taxes are owed – but would like to file one, perhaps to elect portability of the exemption amount – the IRS has discretion to extend the filing deadline.

As a result of a large number of requests made to the IRS to extend the filing deadline to claim the DSUE, in 2017 the IRS decided to exercise its discretion and provide a blanket extension to file the estate tax return to two years from the date of death.  They did that in Rev. Proc. 2017-34.

Despite that blanket extension, the IRS continued to receive requests to extend the filing deadline. That may have been a result of various factors including the recognition that the 2026 sunset was fast approaching; increased legislative activity and proposals to reduce the exemption amount to $3.5 million; increased legislative activity and proposals to limit or restrict the use of certain estate tax minimization strategies; and appreciation in stock and real estate portfolios.

So, in June 2022, the IRS issued Rev. Proc. 2022-32 to extend the filing deadline again.  This time, it was extended to five years from the date of death.

Clearly, for married couples with some wealth, electing portability by filing a federal estate tax return upon the first spouse’s death may be smart estate and tax planning. This allows the surviving spouse to shield more assets from estate taxes and to account for the potential of significant appreciation in wealth between the time of the first spouse’s death and the second. This also helps to protect against the possibility that Congress may decide to lower the exemption amount in the future.  The end result would mean  more wealth is passed on to children and other family members and friends.

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