By Dalton Bradshaw, CPA

On July 8, 2022, in a taxpayer-friendly move, the IRS announced relief for estates making a late portability election for a deceased spousal unused exclusion (DSUE) with the release of Revenue Procedure 2022-32. By making a portability election, an estate’s executor or personal representative can transfer (port) the unused portion of the decedent’s unused lifetime exclusion to his or her surviving spouse. For example, if a decedent dies with an estate that is worth $4 million and has $10 million of his lifetime exemption remaining, then the $6 million of his DSUE would be transferred to his surviving spouse. If the surviving spouse also had $10 million of her lifetime exemption remaining prior to her spouse’s death, then they would have a total remaining lifetime exemption of $16 million after the portability election had been made with the filing of the estate’s Form 706. Prior to the introduction of portability, the $6 million of exemption unused at the death of the first spouse would have been permanently lost. As of 2022, the lifetime estate and gift tax exemption is set at $12.06 million.

Since its introduction in 2010, the portability election has provided significant tax savings to estates. However, since an estate tax return (Form 706) is not required to be filed if the gross estate’s value is less than the decedent’s remaining lifetime exemption amount, many surviving spouses did not timely file Form 706 and were unable to claim the DSUE amount. In response to the lack of elections claimed due to filing requirements, the IRS offered its first form of relief in 2017 with the release of Revenue Procedure 2017-34. This allowed executors of estates to make a portability election by filing a late Form 706 and citing the Rev. Proc. 2017-34. The IRS would then review the return and grant or deny the election through a private letter ruling (PLR).

Since the release of Rev. Proc 2017-34, the IRS has observed that the bulk of the PLRs that were issued were made within five years of the decedent’s date of death. Given this trend and the significant amount of time it takes to grant relief via PLR, the IRS issued Rev. Proc. 2022-32 to provide a more simplified method of making a late portability election.

The simplified late portability relief allows executors of estates to make a late election within five years of the decedent’s date of death if:

  • The decedent was survived by a spouse
  • The decedent died after December 31, 2010
  • The decedent was a U.S. citizen
  • The executor is not required to file Form 706 due to the gross value of the estate
  • The executor did not timely file Form 706 by statutory deadlines (nine months after date of death; 15 months if extended)

If the decedent meets all aforementioned requirements for the late portability election, the executor of the estate can make the election by (1) filing a completed and properly prepared Form 706, including the portability election, on or before the fifth anniversary of the decedent’s date of death, and (2) including “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER §2010(c)(5)(A)” on Page 1 of the estate tax return. If the requirements for the late portability election have been met, then relief is automatically granted with the filing of Form 706 and the PLR process is avoided entirely.

However, executors should exercise caution when utilizing relief under Rev. Proc. 2022-32 to ensure that the estate tax return is accurate and properly prepared. If, upon review, the IRS determines that the estate did have a filing requirement after relief has been granted, then the portability election will be rendered null and void.

The relief offered by the IRS in Rev. Proc. 2022-32 is a great benefit to estates and allows more flexibility in planning and administering estates for executors and advisors. For instance, if a surviving spouse’s assets appreciated significantly following his/her spouse’s death and a Form 706 was not filed, it would be an opportune time to take advantage of this relief. If you have any questions or would like to discuss how this relief applies to your estate planning, please contact your BMSS professional at (833) CPA-BMSS.

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