Portability of Deceased Spousal Unused Exclusion Extended - The CPA Journal (2024)

The Unified Transfer Tax System

The U.S. unified transfer tax system taxes the aggregate of the transfer of property during an individual’s lifetime (gifts) and property transferred because of an individual’s death (see IRC section 2001). The system is structured so that the sum of an individual’s taxable gifts and net assets transferred at death must exceed an applicable exclusion amount before any gift or estate taxes are imposed. The applicable exclusion amount is $12,920,000 for 2023 and will be adjusted for inflation in future years (Revenue Procedure 2022-38, 2022-45, IRB 445). This unified exclusion amount exempts the first $12,920,000 of cumulative transfers through gifts and upon a taxpayer’s death. Within a marriage, each spouse has a unified exclusion amount of $12,920,000.

The Tax Cut and Jobs Act of 2017 (TCJA, P.L. 115-97) temporarily doubled the applicable exclusion amount for tax years 2018–2025. Without amendment, the exclusion will revert to half of the inflation-adjusted amount in 2026. This temporary increase is often called the “temporary exemption” or “bonus exemption.”

Unified Exclusion Amount or Unified Transfer Tax Credit

Tax professionals have begun using the term “Unified Exclusion Amount” because it is often easier to communicate than the term “Unified Credit.” The unified credit for 2023 is $5,113,800. Applying the gift and estate rates to an estate of $12,920,000, the tax would be computed as follows:

($12,920,000 − 1,000,000) × .40 = $4,768,000 + 345,800 = $5,113,800

Consequently, the Unified Credit of $5,113,800 would cover the taxes computed on an estate of $12,920,000.

Estate and Gift Tax Rates

The estate and gift tax rates range from 18% of the first $10,000 to 40% of amounts over $1,000,000. The full range of rates results in $345,800 plus 40% of the excess over $1,000,000.

Prior to the portability election (discussed below), a great deal of estate planning was used to ensure a married couple utilized the maximum possible amount of unified exclusion (see “Estate PlanningTechniques,” Advising the 60+ Investor, D. Pulliam-Smith, D. Pulliam, and H. Toles, Wiley, 1999, pp. 183–188). The use of the portability election is now a common planning strategy.

The Portability Election

IRC section 2010(c)(4) specifically allows for the estate of a deceased taxpayer (survived by a spouse) to make a portability election [section 303(a) of the Tax Relief, Unemployment Authorization, and Job Creation Act of 2010]. This portability election allows the surviving spouse to apply the deceased’s unused exemption amount to their own transfers during life and at the time of one’s death. By properly calculating and timely filing of the Deceased Spousal Unused Exemption (DSUE), heirs can effectively mitigate their tax liability on the estate they have inherited. Revenue Procedure 2022-32 states that the executor of the deceased’s estate can only apply for the portability election under the following circ*mstances:

• The deceased was a spouse.
• The deceased died after 12/31/2010.
• The deceased was a citizen or resident of the United States at death.
• The estate was not required to file an estate tax return based on the gross value of the estate and adjusted taxable gifts.

These portability provisions of the 2010 legislation were set to expire on January 1, 2013; however, section 101(a) of the American Taxpayer Relief Act of 2012 made the ability to elect portability election permanent.

Extension of Time to Make Portability Election

Revenue Procedure 2022-32 became effective on July 8, 2022. This guidance allows certain taxpayers an extended amount of time (five years) to make a “portability election” regarding estate and gift taxes.

When first enacted, the executor of an estate was required to elect portability within nine months of the date of death of the deceased, or the last day of the period covered by a granted extension. (Note that Revenue Procedure 2022-32 only applies to estates that are not required to file an estate tax return, based on the value of the estate and adjusted taxable gifts.) In June 2017, Revenue Procedure 2017-34 effectively extended the time to file for portability election from nine months to two years beyond the death of the taxpayer.

The IRS was inundated with requests from estates asking for an extension to elect portability regarding the DSUE. After a thorough analysis, the IRS determined that a high percentage of these requests have come from the estates of deceased taxpayers who had died within five years preceding the date of the request for portability election.

Due to the high number of extension requests and their limited resources, the IRS and the Treasury Department determined that an estate not required to file an estate tax return would be allowed to make the portability election on or before the fifth anniversary of the taxpayer’s death.

The executor of the estate must remember to complete and properly prepare Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, within five years of the taxpayer’s death. In addition, the executor of the estate must state at the top of Form 706 that the return is “Filed Pursuant to Revenue Procedure 2022-32 to Elect Portability under section 2010 (c)(5)(a)” to fulfill portability requirements.

The following examples provide guidance for filing the election.

Example 1

Harold and Samantha Wilson are a married couple. Harold dies on January 1, 2018, survived by Samantha. The assets includible in Harold’s gross estate consist of cash on deposit in bank accounts held jointly with Samantha with rights of survivorship in the amount of $4,500,000. Harold made no taxable gifts during life. Harold’s executor is not required to file an estate tax return under IRC section 6018(a) and does not file such a return.

Samantha dies on January 29, 2021. Samantha’s taxable estate is $17,000,000, and Samantha made no taxable gifts during life. Samantha’s executor files a Form 706 on behalf of Samantha’s estate on October 29, 2021, claiming an applicable exclusion amount of $11,700,000. Samantha’s executor includes payment of the estate tax with Form 706.

Pursuant to Revenue Procedure 2022-32, Harold’s executor files a complete and properly prepared Form 706 on behalf of Harold’s estate on December 1, 2022, reporting a DSUE amount of $11,180,000. The executor includes at the top of Form 706 the statement required by section 4.01(2) of Revenue Procedure 2022-32. The filing of the return satisfies the requirements for a grant of relief under this revenue procedure, and Harold’s estate is deemed to have made a valid portability election. The IRS accepts the return of Harold’s estate with no changes.

To recover the estate tax paid, Samantha’s executor must file a claim for credit or refund of tax by October 29, 2024 [the end of the period of limitations prescribed in IRC section 6511(a)], even though a Form 706 to elect portability was not filed on behalf of Harold’s estate at the time Samantha’s estate filed its Form 706. Such a claim filed on Form 843, Claim for Refund and Request for Abatement, in anticipation of the filing of Form 706 by Harold’s executor, will be considered a protective claim for credit or refund of tax. Accordingly, as long as the Form 843 is filed on or before October 29, 2024, the IRS can consider and process that claim for credit or refund of tax once Harold’s estate is deemed to have made a valid portability election and Samantha’s estate notifies the IRS that the claim for credit or refund is ready for consideration. (Adapted from Example 1, Revenue Procedure 2022-32, 2022-30 IRB 101.)

Example 2

The facts relating to Harold and his estate are the same as in Example 1. Samantha makes a gift to her daughter of $13,000,000 on December 1, 2020. Samantha has made no prior taxable gifts. On April 15, 2021, Samantha’s executor files Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, claiming an applicable exclusion amount of $11,580,000. Samantha’s executor tenders payment of the gift tax with Form 709.

To recover the gift tax paid, Samantha’s executor must file a claim for credit or refund of tax (protective or otherwise) within the time prescribed in IRC section 6511(a) for filing a claim for credit or refund—in this case, April 15, 2024 (Adapted from Example 2, Revenue Procedure 2022-32, 2022-30 IRB 101).

Example 3

The facts are the same as in Example 2, except that Samantha’s Form 709 claims an applicable exclusion amount of $22,760,000, including a DSUE amount of $11,180,000 from Harold’s estate. As a result, Form 709 reports no tax due and Samantha’s executor tenders no gift tax.

Although the portability election, once made, makes Harold’s DSUE amount available to Samantha retroactively to Harold’s date of death, that DSUE amount is not available until the election is made. Because Samantha’s executor files the Form 709 before Harold’s estate makes the portability election, the claimed application of the DSUE amount will be denied and gift tax on the transfer will be assessed. Samantha’s executor pays the gift tax assessed. To recover that gift tax once the portability election has been made by Harold’s estate, Samantha’s executor must file a claim for credit or refund of tax (protective or otherwise) within the time prescribed in IRC section 6511(a) for filing a claim for credit or refund (adapted from Example 3, Revenue Procedure 2022-32, 2022-30 IRB 101).

Reach Out to Affected Individuals

Individuals responsible for estates that have not made the portability election should take care to file Form 706 within five years of the decedent’s death. As noted above, the executor of the estate must state at the top of the form that the return is “Filed Pursuant to Revenue Procedure 2022-32 to Elect Portability under §2010 (c)(5)(a)” in order to fulfill portability requirements. CPAs should contact clients whose spouses have recently died in order to review the possibility of making an election under this Revenue Procedure 2022-32. A letter that could tailored be used with such situations is shown in theSidebar.

Lisa Lightfoot, CPA is an instructor of accounting at West Texas A&M University, Canyon, Texas.

Darlene Pulliam, PhD, CPA is a professor emeritus at West Texas A&M University, Canyon, Texas.