The federal government is giving widows and widowers more time to deal with the intricacies of the estate tax after a spouse dies. When one spouse dies, their partner often inherits all or part of the deceased person’s estate. Assuming All is planned correctly, the surviving spouse receives those assets tax-free. The surviving spouse can also carry over the deceased’s spouse’s unused estate tax exclusion (DSUE) if they file an estate tax return and choose what the Internal Revenue Service calls portability. Under prior rules, a surviving spouse had up to 15 months to file the return. The application window was extended to two years in 2017, and then five years last week because so many families were missing the deadline.
The change means less hassle for widows and widowers – and their adult children helping to settle their estates – and it sets the families up for potentially big estate tax savings. The reason portability exists is because the federal estate tax is levied per person and has a floor before it kicks in. Without portability, in theory, a tax designed per person would charge the assets of both spouses given one partner usually dies first. For 2022, the exclusion amount is set at $12.06 million per person.
Here’s how it works: Say a husband dies and leaves $2 million to his children and $10 million to his wife. With portability, the wife gets to tack his $10 million unused exclusion amount unto her estate, meaning more can be sheltered from estate taxes at her death. So the wife would be able to shield $22 million federal estate tax, which is levied at 40%.
If the executor of the first spouse to die doesn’t elect portability on an estate tax return, and then the surviving spouse dies with $2 million over the estate tax exclusion amount, it would cost the estate $800,000 in unnecessary federal estate taxes, for example. Portability is expected to affect many in years to come, as asset values increase and estate tax exemptions are reduced.
Even those with estates much smaller than $12 million should consider filing an estate tax return at the death of the first spouse, with the intent to use portability, since the thresholds for the tax may be reduced in coming years.
On Jan. 1, 2026, the Trump tax cuts expire. At that time, the exclusion amount that an individual can shelter from estate taxes is scheduled to drop back to the mid $6 million range, though inflation will determine the exact number. Separately, the Biden administration has proposed lowering the exclusion amount back to the 2009 level of $3.5 million per person. So families with smaller estates – below the $12 million threshold – should still consider filing an estate tax return on the first spouse’s death and choose the portability option.
The new IRS five-year rule applies to estates not required to file an estate tax return for any reason other than to choose portability, in other words, a non-taxable estate. The deceased must have been a U.S. citizen or resident, be survived by a spouse, and have died after 2010.
The IRS will no longer issue special rulings for families on or before the fifth anniversary of a death. If you have a pending private letter ruling request, the IRS will close the file and refund the user fee. Then you can file an estate tax return, Form 706, electing portability.
The risk-reward of the cost of doing the return is something but modest compared to the cost if you’re wrong and the surviving spouse’s estate is otherwise above the exclusion amount when she dies.
Those missing the five-year deadline will have to ask for a private IRS letter ruling. That can take six months or longer and it’s too early to know whether the IRS will continue to rule in favor of taxpayers on this issue.
