Marc A. Bronstein A Professional Law Corporation

On July 8, 2022, the Internal Revenue Service issued new guidance allowing for the estate of a deceased person to elect “portability” of the deceased spouse’s unused gift and estate tax exemption up to five (5) years after the death. Thus, if your spouse passed away less than five years ago, you may be eligible to file an estate tax return and transfer the deceased spouse’s unused estate tax exclusion to yourself.

What Is Portability, and How Does One Get It?

Portability is a way of transferring the amount of the gift and estate tax exemption that a deceased spouse did not use to the surviving spouse. In other words, the unused gift and estate tax exemption is portable, or transferrable to the surviving spouse to make use of at their death.  It is only available to married couples.

To get the benefit of portability, the executor of an estate must file a federal estate tax return. Previously, this return had to be filed within two (2) years of a person’s date of death, assuming an estate tax return was not required sooner. However, since so many estates kept missing this window, the IRS decided to extend it to five (5) years.

Hypothetically, if your spouse has passed away, you are the executor of their estate, and the total value of your spouse’s assets in their estate is below the threshold for federal estate taxation, you may assume that no estate tax return needs to be filed. While this is technically correct, if you do not file an estate tax return, there is no way to transfer over your spouse’s unused estate tax exclusion for your benefit.

The federal gift and estate tax exclusion as of 2022 is $12.06 million per person ($24.12 million for married couples). A person can give away — either during their lifetime or at death — up to this amount, tax-free. 

To be eligible, the deceased spouse must have been a U.S. citizen or permanent resident on the date of their death, and the executor must not have been otherwise required to file an estate tax return based on the value of the total estate and any taxable gifts. If an estate tax return was filed within nine (9) months after the spouse’s death or an extended filing deadline, the portability option may also not be available.

In the above example, if your combined community  property estate was worth $14 million, meaning the Deceased’s Spouses estate was worth $7 million, that would leave an unused exemption of $5.06 million, which you could add to your own $12.06 million exemption, should you ever need it. In order to make use of this excess amount, though, you must file an estate tax return for your spouse and complete the section currently entitled “portability of deceased spousal unused exclusion.”

Now Is a Good Time to Consider If You Could Benefit From Portability

Absent additional action from Congress, the current federal gift and estate tax exemption will be reduced by half in 2026. So, if you have a spouse who died in the past five (5) years, you may want to consider  whether electing portability makes sense sooner, rather than later. 

Back to the example above, and assuming the current federal gift and estate tax exemption is in fact reduced by half in 2026, if portability is elected, and the surviving spouse dies in 2027, the $5.06 million of unused gift and estate tax exemption for the Deceased Spouse will be added to the $6.03 million gift and estate tax exemption for the Surviving Spouse, allowing or $11.09 million of assets to transfer tax free at the Surviving Spouse’s death (reduced by any reportable gifts made during the Surviving Spouse’s life).  Alternatively, if the portability election is not made, and the current federal gift and estate tax exemption is in fact reduced by half in 2026, the Surviving Spouse’s estate would owe estate tax on almost $1 million worth of assets (assuming no appreciation in value of the $7 million comprising the Surviving Spouse’s share).

For families with some wealth, this option could result in hundreds of thousands of dollars or more in tax savings. Many families might not have an estate tax problem now, under the gift and estate tax exclusion of 2022. However, if the second spouse dies after 2026, that spouse’s estate could owe hefty taxes. Portability allows you to plan ahead to avoid this problem. Contact an attorney at the Law Offices of Marc A. Bronstein now to learn more.