Portability can be helpful for large estate.
Most people would rank taxes as one of their least favorite things.
Be honest now.
That includes you, too.
Exceptions include the IRS, state and federal governments, and many tax accountants.
The government levees a variety of taxes including income taxes, property taxes, capital gains taxes, and death taxes.
According to a recent Ag Web article titled “Use Portability to Avoid a Potential Multi-Million Dollar Estate Mistake,” the impact of these of taxes depends on the value and quality of the assets.
While the federal estate tax applies to every American citizen, certain states also levee their own estate tax.
The current federal estate tax exemption threshold is set at $12.92 million for each individual.
This figure covers about everyone, yes?
This is set to drop to about $6.6 million in 2026.
Some states with an estate tax tend to use the federal levels to determine their thresholds while others select their own thresholds.
Either way, “portability” can make the exemption go further for married couples.
What is it?
Well, technically, it is the “Deceased Spouse’s Unused Exemption” or DSUE for short.
In legal parlance it is pronounced Dee-Soo-Eee.
Let’s just run with portability for our purposes.
Portability allows any unused portion of the estate exemption of the spouse who died first to be transferred to the surviving spouse.
This makes it possible to transfer more wealth to the next generation while owing little to no estate taxes.
It also makes for simplified estate planning to accomplish this objective.
If one spouse dies prior to December 31, 2025, then the surviving spouse can lock in the higher exemption.
But this portability benefit is not automatic.
Action steps must be taken by the surviving spouse even if no taxes are owed and all property is jointly owned.
How does one elect portability?
The Form 706 Federal Estate Tax Return must be filed with the IRS by the surviving spouse.
Although some financial advisors find portability to be unnecessary, most estate planning attorneys disagree.
One estate planning attorney recommends the CPAs and financial advisors secure a written waiver from surviving spouses confirming their decisions to decline portability elections.
Portability is still a fairly new development for farming couples.
An estate planning attorney can help a surviving spouse file a Form 706.
To do this the asset values may need to be estimated to the nearest quarter million at the time of the death of the first spouse.
To be effective, the Form 706 must be submitted to the IRS within nine months of the date of death of the first spouse.
With the use of Form 4768, this deadline be extended for another six months.
What happens if the surviving spouse misses the original filing deadline?
Surviving spouses may be able to invoke “Relief under Revenue Procedure 2022-32” to elect portability up to five years from the date of the death of the first spouse.
Because the volume of extensions received by the IRS in 2022 was so high, the government made this adjustment to give surviving spouses greater flexibility.
Married couples should discuss portability elections with an experienced estate planning attorney as part of their comprehensive estate planning.
Reference: Ag Web (Jan. 30, 2023) “Use Portability to Avoid a Potential Multi-Million Dollar Estate Mistake.”