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


Continue ReadingPortability Elections: Update

Higher Estate Tax Exemption Means You Could Save Income Taxes by Updating Your Estate Plan

Updating your estate plan can save taxes.
Updating your estate plan could save taxes.

The estate tax exemption doubled as a result of the Federal Tax Cut and Jobs Act, raising it to historic highs. The estate tax exemption had been scheduled to increase to $5.6 million per person in 2018, but it was modified by the recent legislation to reach the current level of $11.2 million per person, or $22.4 million per couple. The inflation-adjusted exemption for 2019 is $11.4 million per person, or $22.8 million per couple.

In the article “Updating estate plan could save heirs in taxes,” the Atlanta Business Chronicle asks why this matters to an individual or couple whose net worth is nowhere near these levels.

When the most that could be transferred to a non-spouse beneficiary was under a million dollars, everyone worried about the estate tax and used trusts to minimize its effect. Since the estate tax was so much higher than the capital gains tax, it was never considered a big deal if a beneficiary paid the capital gains tax on selling trust assets, because it was less costly than paying the estate tax.

In the past, a married couple’s estate plan would often call for the deceased spouse’s assets to be placed in a trust for the surviving spouse (often called a “bypass trust”). The goal was for the trust to provide for the surviving spouse until the surviving spouse’s death, at which point the trust assets bypassed the estate of the surviving spouse and went directly to the beneficiaries, usually the spouses’ children. If the beneficiaries sold trust assets after the surviving spouse’s death, they would pay the income tax based on the value of the assets at the first spouse’s death, as oppposed to the value of the assets at the surviving spouse’s death. The higher the assets appreciated between the time of the first spouse’s death and the second spouse’s death, the higher the income tax.

For example, if a spouse owned $10,000 worth of stock which passed to a bypass trust at his or her death, and the stock increased to $100,000 at the death of the surviving spouse, the heirs would pay capital gains taxes on the amount of the appreciation ($90,000) upon the sale of the stock. If, however, instead of being in a bypass trust, the stock were included the surviving spouse’s estate, when the beneficiaries sold the stock, they would not have to pay capital gains taxes on the $90,000 of appreciation that occurred between the first spouse’s death and the surviving spouse’s death. That could be a substantial tax savings.

For those who included bypass trusts in their estate plans just to save on estate taxes, updating their estate plan to eliminate the bypass trust could bring greater simplicity as well as tax savings for the heirs.

It should be noted that the law creating the present $11.4 million estate tax exemption ends at the end of 2025, when the estate tax exemption will return to $5 million (adjusted for inflation). Because the tax laws are constantly changing, it is always a good idea to revisit your estate plan at least every three years. Learn more about what married couples should consider when updating their estate plan at https://www.galliganmanning.com/life-stages/planning-for-married-couples/

Reference: Atlanta Business Chronicle (May 31, 2019) “Updating estate plan could save heirs in taxes”

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Continue ReadingHigher Estate Tax Exemption Means You Could Save Income Taxes by Updating Your Estate Plan