“Portability” is the ability of a surviving spouse to elect to add his or her predeceased spouse’s unused estate tax exemption to their own estate tax exemption. For many clients, adoption of portability in 2010 (and making portability permanent in 2012) meant that complicated estate plans could be greatly simplified. Prior to portability, any unused estate tax exemption of the first spouse to die was simply lost. Ensuring use of the first-to-die’s exemption, or capturing as much as possible based on the assets in his or her estate, generally meant funding assets into a credit shelter trust for the surviving spouse. Especially for couples with a joint taxable estate between one and two exemptions (currently $12.06 million and $24.12 million), portability now may be an intentional part of the estate plan or, alternatively, save a bad (or no) estate plan. The current status of the law reduces estate tax exemptions in half at the end of 2025. As such, couples with a joint taxable estate of more than half of current exemptions (approx. $6 million) should not miss the opportunity portability provides to capture any unused estate tax exemption of the first to die.
To be clear, portability is no panacea. Among other things, portability does not apply for generation skipping transfer tax, does not protect assets from unintended disposition by the surviving spouse, is lost upon the death of a subsequent spouse of the survivor, and does not provide creditor protection available through the use of traditional credit shelter trusts.[1] However, for clients with moderately sized estates who prioritize simplification, portability may provide the right outcome, especially for first marriages where all children are joint. Also, portability allows for an adjustment to income tax basis at the second death without the need for more sophisticated income tax planning. With currently large estate tax exemptions, income tax benefits may outweigh estate tax planning for many couples.
To benefit from portability, the decedent’s executor must timely file an estate tax return for the purpose of making the portability election. Otherwise, the surviving spouse cannot port the remining exemption of the first-to-die. In issuing Rev. Proc. 2022-32, the IRS has just eased obtaining late relief for failure to timely make an estate tax portability election. This new process offered by the IRS replaces prior procedures described in Rev. Proc. 2017-34 (which followed prior issuance of Rev. Proc. 2014-18), in a taxpayer favorable way by extending the deadline to qualify for simplified relief from two years after the death of the fist-to-die to five years.
Portability Election and Late Filing Relief
This “ported” exemption is referred to as the “deceased spousal unused exclusion amount” (“DSUE”).[2] In order to take advantage of the DSUE, the executor[3] of the estate of the deceased spouse must timely file an estate tax return which computes the DSUE.[4] The timeline is nine months from date of death or on the last day of any permitted extension (generally 6 months).[5]
If an executor fails to timely file an estate tax return electing portability, then the only way to obtain relief from that failure is to pursue 9100 relief.[6] In order to obtain such relief, the taxpayer must establish to the satisfaction of the IRS that the taxpayer acted reasonably and in good faith and that granting the requested relief will not prejudice the interests of the government.[7] Absent any special procedure allowed by the IRS, the method of obtaining 9100 relief is to request a private letter ruling.[8] Seeking a private letter ruling requires the payment of substantial user fees[9] to the IRS as well as costs of tax counsel to prepare the ruling request.
In 2017, the IRS issued Rev. Proc. 2017-34 generally granting a period of time of up to two years following a decedent’s date death within which to seek simplified late relief. Using that procedure, an executor who had not yet filed an estate tax return (and who was not otherwise required to do so under IRC § 6018(a)) simply files a complete and properly prepared estate tax return typing at the top of the return “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A)” prior to the second anniversary of the decedent’s date of death. By doing so, the estate tax return is deemed to have been filed timely for purposes of the surviving spouse’s right to “port” the first-to-die’s remining estate tax exemption. A surviving spouse desiring to benefit from portability outside of this two year window was required to seek 9100 relief under the generally applicable requirement of seeking a private letter ruling.
After the issuance of Rev. Proc. 2017-34, the IRS continued to process numerous private letter ruling requests seeking 9100 relief for surviving spouses outside of the two year window. Given that the IRS has fairly liberally granted 9100 relief in these circumstances, dedicating substantial IRS resources to processing these ruling requests is an inefficient use of resources. As such, Rev. Proc. 2022-32 extends the deadline to apply for simplified relief from two years after the death of the first-to-die to five years. Otherwise, the requirements of Rev. Proc. 2017-34 remain generally unchanged (including the typing at the top of the estate tax return, substituting the updated Rev. Proc.). Likewise, Rev. Proc. 2022-32 relief is not available for estates where a timely estate tax return already was filed or for estates that were otherwise required to file an estate tax return. For estates outside of this five year window, just like the prior two year window, relief may still be granted. However, the more onerous process and greater expense of seeking a private letter ruling will be required.
Conclusion
As stated above, portability is not the right planning answer for many couples. However, for others, it may be a way to simplify an estate plan without losing tax benefits. Also, portability may be a way to maximize the potential for a step-up in cost basis at both deaths while planning for a possible reduction in estate tax exemptions. Beyond these intentional uses of portability in an estate plan, the ability of a surviving spouse to port their predeceased spouse’s unused exemption may be a “dumb but lucky” savior from a failure to plan. As such, portability is a welcome part of the estate planning landscape.
To use portability, there is a tight deadline – nine months from date of death which may be extended to fifteen months with the filing of a request for extension. Many times, especially for clients who do not require more sophisticated estate planning, this deadline passes without them even being aware of the possibility of using portability or the potential need to do so. Often, it is not until the death of the surviving spouse that this becomes apparent. Requiring taxpayers to incur the time and expense of a private letter ruling, and using the IRS’ resources to process those requests, is inefficient for all involved. This extension from a two year window to a five year window is welcome. Certainly, many taxpayers may still fall outside of the deadline established in Rev. Proc. 2022-32, but many more will now qualify for streamlined relief.
[1] For a more in-depth discussion of the pros and cons of portability, see Blattmacher, Jonathan G., Austin W. Bramwell, and Diana S. C. Zeydel, “Portability or No: The Death of the Credit Shelter Trust,” 118 J. Tax’n 232 (May 2013).
[2] IRC §2010(c)(4)
[3] The executor of the deceased spouse’s estate may be someone other than the surviving spouse. See IRC §2203 and Treas. Reg. §§20.2010-2 and 20.2203-1. See Voss v. Lee, 390 P.3d 238 (Okla. 2017) for a case where a court compelled the executor of an estate to file an estate tax return to elect portability over the executor’s objection.
[4] IRC §2010(c)(5)(A)
[5] Treas. Reg. §20.2010-2(a)(1)
[6] Treas. Reg. §301.9100-3
[7] Id.
[8] Treas. Reg. §301.9100-3(e)(5)
[9] See Rev. Proc. 2022-1
