This article was featured in the Naples Daily News Estate Planning Council Supplement on March 12, 2023
When a United States citizen or resident dies, if the decedent’s estate exceeds a certain threshold amount, the estate is required to file a Form 706 Estate and (Generation-Skipping Transfer) Tax Return. This threshold amount, the Basic Exclusion Amount, is $12,920,000 for the year 2023. Even if a decedent did not leave an estate that is large enough to require the filing of a 706 return, it may still be beneficial to do so because this is the only method available for the decedent’s estate to make a so-called portability election, more formally known as an election to transfer the deceased spousal unused exclusion (DSUE) amount. The DSUE (practitioners usually pronounce DSUE as “duh-soo-uh”) is the amount that is left over from a decedent’s Basic Exclusion Amount after subtracting the value of the decedent’s estate and gifts made during the decedent’s life that used up some of the Basic Exclusion Amount. If a decedent’s estate and lifetime gifts have not used up the decedent’s entire Basic Exclusion Amount, then the decedent’s estate might file a 706 return for the purpose of allocating what remains of the decedent’s Basic Exclusion Amount to the decedent’s surviving spouse. If the election is done properly, the decedent’s surviving spouse would, in effect, be able to add the DSUE amount to his or her own Basic Exclusion Amount and treat the total as his or her new Basic Exclusion Amount. So if a surviving spouse is likely to have an estate upon his or her own death that exceeds what his or her own Basic Exclusion Amount would be, electing portability can shield more of his or her estate from estate tax.
In making the decision on whether to file for portability, it is important to consider that when the surviving spouse dies, the Basic Exclusion Amount available to the surviving spouse may not be as high as it is now. The Basic Exclusion Amount was significantly increased in recent years by the Tax Cuts and Jobs Act. From the year 2017 to 2018, the Basic Exclusion Amount was increased from $5,490,000 to $11,180,000, and adjustments for inflation have only increased the Basic Exclusion Amount since then. However, this increase in the Basic Exclusion Amount will end after the year 2025, and the Basic Exclusion Amount is projected to go back down to about $6,800,000 in 2026. Consider the following example: Husband and Wife each own assets worth $8,000,000. Husband dies in 2023 (and his estate passes at death to a standard credit shelter trust for the benefit of Wife). Wife dies in the year 2026. Husband’s estate will not owe estate tax, and a 706 return will not be required for his estate. The DSUE is $4,920,000. If Husband’s estate does not file a 706 return in order to elect portability, then upon the death of Wife, Wife’s estate of $8,000,000 will be shielded only up to $6,800,000, and the remaining $1,200,000 will be subject to estate tax, with a tax bill of approximately $480,000. In contrast, if Husband’s estate had elected portability, then Wife’s estate would be able to shield up to $11,720,000 from estate tax, and her entire estate could pass free of the estate tax.
If an estate is required to file a 706 return because the estate exceeds the Basic Exclusion Amount, the return must be filed within nine months of the date of death (subject to an automatic six month extension and extensions for cause.) The IRS has issued a new rule, effective July 8, 2022, which allows an estate that is not otherwise required to file a 706 return to do so for the purposes of electing portability by the fifth anniversary of the decedent’s death. While portability election can be an excellent tool to shield additional assets from estate tax upon the death of the surviving spouse, it is important to note that portability only gives added protection from estate tax, not generation-skipping transfer (GST) tax. Though GST tax is outside the scope of this article, professional consultation with an estate planner is essential for limiting exposure to both estate tax and GST tax.