Late Portability Elections

Take-Away: The IRS recently extended the time when a ‘late’ Form 706 Federal Estate Tax Return can be filed on which a portability election is made, going from two years after the deceased spouse’s death to five years after the deceased spouse’s death.

Background: In Revenue Procedure 2022-32 the IRS changed a 2017 Revenue Procedure, to extend the time in which a decedent’s estate could file a ‘late’ Form 706 on which to elect portability, or the transfer of the deceased spouse’s unused applicable exemption amount (DSUEA) to their surviving spouse. [IRC 2010(c)(5)(A).] The 2017 Revenue Procedure provided that if no federal estate tax return was required to be filed because the decedent’s estate was not large enough to require a federal estate tax return to be filed, the decedent’s estate had 2 years from the decedent’s death in which to file a ’late’  Form 706 on which the portability election could be made. Apparently numerous estates missed the 2-year deadline, which resulted in a flood of private letter ruling (PLR) requests to the IRS to extend the time in which to file the ‘late’ Form 706. Seemingly weekly, PLRs were issued by the IRS granting an extension of time in which to file a late-filed Form 706. Accordingly, this caused  the IRS to devote extensive resources and man-power to address these numerous PLR requests each week dealing with portability. The motive behind this most recent Revenue Procedure 2022-32 is to reduce the number of PLRs that the IRS has to respond to, by extending the time in which an estate may file a ‘late’ Form 706 from 2 years after the deceased spouse’s death to 5 years. This change will also save decedent’s estates extensive PLR filing fees and legal expenses in filing the PLR request, which is always a good thing.

Portability Conditions: A summary of the conditions to file a Form 706 federal estate tax return on which to seek the transfer of the decedent’s DSUEA to the surviving spouse follow:

1. The decedent is survived by a spouse.
2. The decedent died after December 31, 2010.
3. The decedent was a citizen or U.S. resident on the date of death.
4. The decedent’s estate’s Personal Representative (or executor) was not required to file a Form 706 based on the value of the decedent’s gross estate and adjusted taxable gifts without regard to the need to file a return to elect portability, e.g. the decedent’s gross estate was less than his available applicable exclusion amount of $12.06 million.
5. The Personal Representative did not file a Form 706 within the time for filing a Form 706, per Treasury Regulation 20.2010-2(a)(1), e.g. 9 months after death, or with the 6 month extension; and
6. The Personal Representative files a Form 706 under the procedure outlined in Revenue Procedure 2022-32.

Observation: The principal drawback to filing a Form 706 on which the portability election is made is that the Regulations make it clear that a full and complete Form 706 must be filed- just to make the portability election. [Treasury Regulation 20.2010-2(a)(7).] There is no such thing as a ‘short-form’ Form 706 on which the portability election can be made. That means that each of the decedent’s assets must be valued (many assets may need to be formally appraised, like real estate, collectibles, closely held business interests) and a fully complete Form 706 is then filed  just to make the portability election. This translates into the high cost in appraisal fees, accounting fees and/or legal fees, just to file the Form 706, when in the absence of a desire to elect portability, no federal estate tax return would otherwise have to be filed.

Consider the normal situation where one spouse dies and the surviving spouse, who is  grieving, emotional, and often fearful of his/her financial security going forward, e.g. losing one of the spouse’s Social Security retirement benefits, is told that he/she should incur several thousands of dollars in expenses just to prepare a Form 706 on which portability can be elected, when no return needs to be filed. Many widows and widowers push-back on that advice to  spend thousands now with only the possibility of saving future federal estate taxes (which will not benefit them directly, just their inheriting heirs.) Still, with the scheduled ‘sunset’ of the survivor’s applicable exemption amount come 2026, the survivor’s access to the DSUEA is an important planning option to consider and be discussed with the survivor. Specifically, recall that when the surviving spouse makes a taxable gift, the first gift exemption used to shelter that lifetime gift from taxation is the ported DSUEA amount, thus preserving the survivor’s own applicable exemption amount to shelter transfers at death from future federal estate taxes. It is a difficult discussion, but something that needs to be covered with the survivor spouse before the decision is ultimately made to not prepare and file a Form 706 ‘just to preserve and use the DSUEA.’

Conclusion: This recent Revenue Procedure is welcome news, even if it was motivated primarily to help the IRS divert its resources to other projects. However, not all surviving spouses will agree to incur the additional expense in order to file a full and complete Form 706 just to make a portability election. It is not an easy decision, but if the surviving spouse’s own estate is expected to grow leading to lifetime gifts, a portability election is probably warranted.