Upon her death, Margaret’s children received a $1,576,000 estate tax bill. Unbeknown to her estate, compliance with just one estate law provision could have prevented this grim scenario. Yes, we’re referring to the concept of portability in estate planning.
Electing portability would have ensured an efficient transfer of wealth without a high estate tax liability.
New York estate tax laws are notoriously complicated. According to the Pew Research Center, 82% of Americans routinely experience moderate to high levels of frustration with the tax system’s complexity.
Yet the concept of portability is central to proper estate planning. Below, we explain how the federal estate tax exemption complements portability. More importantly, we reveal how the Tax Cuts and Jobs Act doubled the federal estate tax exemption and how strategic estate planning can help preserve a lifetime of earnings. If you still have questions or want to schedule a consultation, call us at (631) 506-8440.
The Value of the Federal Estate Tax Exemption
The federal estate tax exemption is the amount a taxpayer can pass on to heirs free of federal estate taxes. This amount is indexed for inflation and increases each year. For 2022, the federal estate tax exemption was $12.06 million. In 2023, that amount is $12.92 million.
It’s worth noting that any amount over the exemption is subject to taxation. In other words, if assets bequeathed to surviving spouses are worth more than the exemption amount, the estate will incur federal estate taxes.
What Is Portability in Estate Planning?
Portability in estate tax planning refers to the ability to transfer the deceased spouse’s unused exemption amount (DSUEA) to the surviving spouse. But what does this mean?
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act introduced the concept of portability in 2011. It permitted the transfer of federal estate tax exemptions between spouses. In 2011, an individual could transfer up to 5 million dollars to a spouse without incurring federal estate and gift taxes.
Portability increased a surviving spouse’s federal tax exemption via a DSUEA transfer.
In 2012, the American Taxpayer Relief Act made portability permanent, meaning that individuals can now use the unlimited marital deduction and portability provisions in U.S. estate law to pass unused DSUEA and unlimited cash to their spouses without incurring federal taxes.
An Example of Portability In Estate Planning
Let’s discuss Margaret. Her husband, Bob, passed away in 2022. At the time of his passing, both held joint assets totaling $16 million dollars. Upon death, her husband’s estate used the unlimited marital deduction to transfer his half of their estate ($8 million) to Margaret. No federal taxes were incurred. In addition, the portability provision allowed Margaret to inherit his DSUEA of $12.06 million.
Margaret passed away in January 2023. If Margaret had elected portability, she would have had a combined $ 24.12 million dollars she could have exempted from federal estate and gift taxes.
Thus, her estate of $16 million dollars would not have owed the $1,576,000 tax bill.
It’s worth noting that portability only applies to federal estate taxes. In New York, the state levies its own estate taxes, and there’s no provision for electing portability. Therefore, consulting an experienced estate planning attorney is critical when creating an end-of-life legacy plan.
How to Qualify for Portability
Portability is activated when the election is made by the deceased spouse’s executor. The rules for making the election must be followed to the letter.
The portability election is made by filing Form 706 for the surviving spouse to inherit the DSUEA.
- To elect portability, the estate tax return must be filed regardless of the size of the decedent’s gross estate.
- The election must be made by the executor of the decedent’s estate.
- Executors who failed to timely file Form 706 within nine (9) months of the decedent’s death can now elect portability up to the fifth (5th) anniversary of the decedent’s death. To elect portability under this new extension, the executor must state at the top of Form 706 that the return is “Filed Pursuant to Rev. Proc. 2022-32 to Elect Portability under section 2010(c)(5)(A).”
How the Tax Cuts and Jobs Act Doubled the Federal Estate Tax Exemption
The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the federal estate tax exemption. It was a major change to the federal estate tax law, which has impacted estate planning significantly.
The federal estate tax exemption was $5,490,000 in 2017. The TCJA doubled that exemption (annually adjusted for inflation) from 2018 through 2025.
This tax change is aimed at helping widows/widowers and their adult children save on estate taxes. In 2026 the Estate Tax is set to sunset to a decreased amount. Discuss this with your estate planning attorney to understand how to plan and protect your assets.
High-Net-Worth Individuals Can Now Acquire Greater Savings
Prior to 2017, the estate tax return was due nine months after the decedent’s death (an automatic six-month extension was available upon request).
Generally, requesting this extension required the deceased spouse’s estate to file a private letter ruling request under Treasury Regulations Section 301.9100-3, an expensive and labor-intensive process.
Since grieving families often failed to file estate tax returns to elect portability, the IRS created a simplified filing process in 2017. Revenue Procedure 2017-34 eliminated the need for private letter ruling requests by extending the due date for electing portability to two years after the decedent’s death.
Despite the new provision, many families still missed the two-year deadline and had to file expensive private letter ruling requests after. In 2023, the cost for filing is from $12,600 to $38,000, depending on the time and effort in complying with requests.
On July 8, 2022, the IRS issued Revenue Procedure 2022-32. Now, a decedent’s estate can elect portability without the need to file private ruling requests up to the fifth (5th) anniversary of the decedent’s date of death.
It’s important to remember that Revenue Procedure 2022-32 only applies to estates that aren’t required to file a Form 706 (because electing portability reduces estate and gift taxes to zero). Those who owe estate taxes are still subject to the nine-month filing deadline for Form 706.
For higher net-worth families, claiming the DSUEA by filing Form 706 can result in millions of dollars in tax savings in light of the high current exemptions ($12.92 million per person). Critically, these exemptions will expire on December 31, 2025, and revert back to their 2011 levels. For any individual passing away in 2026 and beyond, the exemption will only equal an inflation-adjusted 6 million dollars.
So, let’s say Margaret dies in January 2026 instead. The exemption is now just $6 million. Failure to elect portability means that Margaret’s $16 million estate will be looking at a hefty tax bill upon her death.
Thus, time is of the essence. Claiming the first-to-die spouse’s DSUEA now could result in little to no tax liabilities. Essentially, filing within five (5) years of a spouse’s death allows individuals to elect portability, avoid expensive private letter ruling requests, and reap significant tax savings. Although you may have missed the 9 month deadline, you may still have options. Discuss your options with and estate planning attorney.
Sheryll Law: Protecting Legacies In New York Estate Tax Planning
Creating a comprehensive estate plan is a complex process, so it’s vital to speak to an attorney familiar with New York estate tax laws.
Estate planning isn’t just about transferring assets to heirs; it’s also about protection from crippling tax liabilities. An experienced attorney can help explain the nuances of estate tax law and create a plan tailored to individual needs.
Sheryll Law is an award-winning firm with many satisfied clients in New York. Call us at (631) 506-8440 today or fill in a short form to schedule a consultation with one of our New York estate tax planning attorneys.
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