The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ushered in a new era of estate tax planning, introducing the concept of “portability” to the federal estate tax system for decedents who died on or after Jan. 1, 2011. For federal estate tax purposes, everyone has an “exemption amount” — an amount which that person can transfer to non-spouses free of federal estate taxes (the amount a person can transfer to a spouse free of federal estate taxes is unlimited assuming the spouse is a U.S. citizen). Pre-2011, the exemption amount was non-transferrable, meaning that if a person died leaving everything tax-free to their spouse, their exemption amount disappeared. Portability allows the surviving spouse to instead add their deceased spouse’s unused exemption amount to their own exemption amount.
The primary benefit of portability is that it allows married couples who may not have engaged in tax-based planning to still take advantage of their combined exclusion amount, whereas previously, the first spouse’s exclusion amount would have been “wasted” at their death. To illustrate, let’s assume that A and B are married. They have a combined estate of $20 million, and all of their assets either are jointly owned or list each other as the primary beneficiary. Under federal law, they each have a roughly $12 million estate tax exemption amount in 2022. When A dies, their share of the combined estate is worth $10 million and automatically passes to B. Under the pre-2011 rules, A’s $12 million exemption amount disappears, meaning that when B dies, they will be able to leave $12 million free of federal estate taxes, and the remaining $8 million will be subject to federal estate taxes. With the existence of portability, however, B is able to add A’s unused $12 million exemption amount to B’s own $12 million exemption amount, meaning that B’s exemption amount is now effectively $24 million. In other words, upon B’s death, all $20 million of the estate passes free of federal estate taxes.
The catch with portability, though, is that it is not automatic. In the example above, in order for B to add A’s unused exemption amount to their own, A’s estate would need to file a federal estate tax return (even though the return is not otherwise required because A’s estate is below the exemption amount) and elect to transfer A’s unused exemption amount to B (often called “electing portability”). Ordinarily, an estate tax return is required to be filed within nine months of death (15 months if an extension is filed within nine months). Since A and B were not particularly proactive about estate tax matters during their lifetimes, it stands to reason that B might not be particularly proactive after A’s death, either.
In fact, the IRS’s own experience bore this out. In the first few years after portability became the law of the land, estate tax returns were still required to be filed within nine months of death even if the sole reason for filing was to elect portability. This led to a surge of individual private letter ruling requests being filed to ask the IRS to allow a decedent’s estate to elect portability late (after the nine-month mark). Because private letter rulings are time-consuming and expensive, the IRS sought to reduce the volume of requests by issuing Rev. Proc. 2017-34 in June 2017, which effectively extended the amount of time to elect portability from nine months to two years. While this helped somewhat, it appears that the IRS was still being inundated with private letter ruling requests because it issued a new revenue procedure (Rev. Proc. 2022-32 — www.irs.gov/pub/irs-drop/rp-22-32.pdf) in July of this year. Rev. Proc. 2022-32 repeals and replaces Rev. Proc. 2017-34, extending the time to elect portability from two years to five years. The new procedure also applies retroactively (meaning that the estate of a decedent who died in, for instance, January 2018 has until January 2023 to file to elect portability).
It is extremely important to note that Rev. Proc. 2022-32 only applies to estates that were not otherwise required to file a federal estate tax re-turn. If a decedent’s estate was required to file an estate tax return for any other reason (e.g., because the value of the gross estate was greater than the exemption amount), Rev. Proc. 2022-32 does not apply, and the estate tax return (including the portability election) must be filed within the normal nine-month deadline (15 months if an extension is timely filed). Equally important to remember is that portability only applies to federal estate taxes; it does not apply to federal generation-skipping transfer taxes or to Massachusetts state estate taxes.
Even with those caveats in mind, Rev. Proc. 2022-32 is a welcome bit of relief for surviving spouses who may have otherwise missed the opportunity to take advantage of portability at the federal level.
Francis R. Mulé is an associate attorney with the Boston firm of Bass, Doherty & Finks PC, where he concentrates his practice in estate and tax planning and estate and trust administration. He is an active member, and the current chair, of the Massachusetts Bar Association’s Young Lawyers Division; a member of the MBA’s Probate Law Section Council; and a member of the Massachusetts LGBTQ Bar Association.