Portability Elections: Update

A month ago I wrote a blog on portability, which is an estate tax concept in which a surviving spouse keeps the estate tax exemption of the deceased spouse.  That blog focused on what it is and its potential tax advantages for families.  See here for that article:  https://www.galliganmanning.com/why-you-should-elect-portability/  

Incredibly, the IRS published a revenue procedure last Friday extending filing deadlines for estates which only need to elect portability to 5 years after death.  The time limit had been 2 years.

Previously, the IRS would consider an extension beyond the 2 year limit in private letter rulings.  Essentially, you could write to the IRS explaining why you would need more time or were unable to complete the return in 2 years, and the IRS would consider an extension.  Portability is sometimes so critical that many, many individuals made private letter requests for extensions past the 2 years.  The IRS indicated they received so many letter request that it placed a “significant burden” on IRS resources, so much in fact that the IRS extended the deadline to avoid the need for those letter requests.

You can find the full revenue procedure here:  https://www.irs.gov/pub/irs-drop/rp-22-32.pdf

Now, it is important to recognize this only changed the deadline for returns that are only filed for portability purposes.  If the decedent had sufficient assets so that a return was required (i.e. their assets met or exceeding their exemption), then it remains due within 9 months of death and not filing timely or paying timely could have serious consequences.  Accordingly, in all cases going forward you should assume the deadline in 9 months, but may have the option of up to 5 years.

The immediate advantage of this rule is it gives us more hindsight.  If you or someone you know lost a spouse in the last 5 years and they did not file an estate tax return, it might be worth considering.  Many people didn’t do this a few years ago because the exemptions were high.  They assumed that if the survivor’s exemption was going to be, say $10 million, then portability wouldn’t be necessary and they didn’t take steps to elect it.

However, currently Congress has not changed the estate tax law.  The exemption is still set to cut in half in 2026.  Further, COVID has disrupted the economy in a way that has negatively affected the market, but also lead to substantial growth in some industries and for some individuals.  So, whereas portability might not have seemed prudent 6 months after the death of a loved one, it might seem so 3.5 years after the death of a loved one.  Thanks to this new procedure, filing for portability is still possible.

Similarly, if you were in charge of an estate, either as an executor, administrator or trustee, it might be worth considering doing this as a prudent discharge of your duties. It would potentially assist a surviving spouse and ultimately lead to less tax for the family, and will avoid questions from beneficiaries about why you didn’t do it in the first place.

You can find the full revenue procedure here:  https://www.irs.gov/pub/irs-drop/rp-22-32.pdf