The IRS recently announced an extension to the two-year portability election, or unused estate tax exclusion, for surviving spouses. This decision to change the election period to five years was made in response to the backlog of taxpayer requests and the number of late filings.
This will not apply to all taxpayers. If a taxpayer has over a $5 million estate, it is worth consulting your tax advisor. This estate size would include investments, real estate, life insurance, retirement plans, etc. As of July 2022, if your deceased spouse was not required to file an estate tax return and the only reason an estate return would be filed is to make a portability election, you now have five years from the date of the spouse's death to do so. This election allows a surviving spouse to capture the unused exclusion from the deceased spouse’s estate and add it to their own lifetime exclusion. These calculations are complex and the help of a trusted tax advisor is key to determining whether an election should be made by filing a Form 706.
Husband dies in 2018. Husband's estate (1/2 of joint assets) in 2018 was $10M and all assets were passed to the wife. An estate return was not required as the lifetime exemption amount in 2018 was $11.18 Million.
The wife now owns 100% of the entire estate and her estate is worth $20M. If the wife were to die in 2022 only $12.06M of her estate would be free from the estate tax and the rest ($20M – $12. 06M = $7.94M ) would be subject to the 40% estate tax—estimated at $3.176 million of tax due.
If a portability election is made on a federal Form 706, the husband’s $11.18 million exemption is given to the wife. If the wife passes away in 2022, her estate exemption amount becomes $23.24 million. No estate tax would be due.
Filing a portability election could save taxpayers millions in estate taxes. If you have questions about protecting and preserving your estate, Kruggel Lawton's team of trusted advisors are here to help.