IRS Extends Time to File Portability Return from Two to Five Years

This month the Internal Revenue Service (“IRS”) published Revenue Procedure 2022-32 (superseding Revenue Procedure 2017-34), which extends the period of automatic relief for a decedent’s estate to elect portability without a private letter ruling from two years after death to five years after death.

Background (Federal Law)

Executors (sometimes referred to as a personal representative, administrator, or trustee) of a decedent’s estate may elect portability for the deceased spousal unused exclusion (“DSUE”) amount. In general, the decedent’s estate must file an estate tax return within nine months of the decedent’s death if the gross estate and adjusted taxable gifts exceed the applicable lifetime gift exclusion amount ($12.06 million in 2022; see below table for exemption amounts since 2017). A six-month extension can be granted by properly filing an extension request. Estates below that threshold are not required to file an estate tax return unless they wish to elect portability of the decedent’s unused lifetime gift exclusion for the surviving spouse.

• 2017: $5.49 million
• 2018: $11.2 million
• 2019: $11.4 million
• 2020: $11.58 million
• 2021: $11.7 million
• 2022: $12.06 million

Revenue Procedure 2022-32 allows estates only filing to elect portability to file the estate tax return up to five years after the decedent’s date of death, preserving the decedent’s unused estate tax exemption. As a result, executors can now file an estate tax return to elect portability for decedents who died after August 2017 and have unused lifetime gift exemption. The portable lifetime exemption amount is based on the applicable allowable amount for the year the decedent died.

Requirements for Eligibility for Extension to Elect Portability Under Rev. Proc. 2022-32

The automatic relief is available to surviving spouses of decedents who died after December 31, 2010. The decedent must have been a U.S. citizen or resident on the date of death, and their estate must meet the following requirements:

1. Was not required to file an estate tax return based on the value of the gross estate and prior taxable gifts; and
2. Did not file a timely estate tax return within nine months of the decedent’s date of death, notwithstanding any extensions.

To take advantage of the automatic relief under this revenue procedure, the executor of the decedent’s estate must complete and properly prepare Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, on or before the fifth anniversary of the decedent’s date of death. The executor filing the Form 706 must state at the top of the form that the return is “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).”

Impact of Relief on Surviving Spouse

If the decedent’s estate is granted relief under Rev. Proc. 2022-32 and the Form 706 is timely filed for purposes of electing portability, then the DSUE amount is available to the surviving spouse, or the estate of the surviving spouse, for gifts the surviving spouse made on or after the decedent’s date of death. The surviving spouse or their estate can file an amended gift or estate tax return, or Form 843, Claim for Refund and Request for Abatement, if they used their own lifetime exclusion amount and paid gift/estate tax on gifts made after the decedent’s death. If the decedent’s Form 706 electing portability has not yet been filed (and is still within the five-year relief period), the IRS will treat the spouse’s amended return or claim for refund as a protective claim until the portability election is filed.

Planning Opportunity

In conclusion, even when an estate tax return is not required, executors should file Form 706 to make a portability election for the decedent’s estate if it is possible the surviving spouse’s gross estate and taxable gifts would exceed their applicable lifetime exclusion amount and the decedent’s DSUE amount could decrease the surviving spouse’s transfer taxes. Regarding any gift or estate taxes paid by the surviving spouse prior to the decedent’s estate portability election, an amended return or other protective claim for credit or refund should be filed to stay within the statute of limitations to receive a credit or refund for taxes paid.

Surviving spouses updating their estate planning should have their tax advisor review the impacts of this new ruling. The procedure effectively allows a second look for estates of decedents that have died since August 2017 and have not filed a Form 706, providing an opportunity to significantly reduce a surviving spouse’s estate taxes. It is rare for the tax authorities to allow a second look – take advantage of this opportunity!

Taxpayers who live in a state that levies a wealth transfer tax should be mindful that this is a federal ruling and a review of state tax laws is required. It should also be noted that portability does not affect generation-skipping transfer (“GST”) tax.

Taxpayers should consult with their Marcum tax advisor or contact a member of the Marcum Trust and Estate practice for further consultation.