What Is Portability and When Should I Make a Portability Election?

Portability is a process in which any unused estate tax exemption can be transferred from the deceased spouse to the surviving spouse, according to a recent article from Ag Web, “Use Portability to Avoid a Potential Multi-Million Dollar Estate Mistake.”

The portability election helps the surviving spouse to put their assets in the best position to be transferred upon their death to the next generation, with little or no estate taxes being owed.

In 2023, each spouse has a $12.92 million exemption from federal gift and estate taxes, but this high amount is set to drop by about $6.6 million per person in 2026. Electing portability now will lock in the high exemption if a spouse dies before December 31, 2025, when the high exemption level ends.

The portability election does not happen automatically, and it is critical to take this action, even if all assets are jointly owned, and no taxes are owed when the first spouse dies. To elect portability, the surviving spouse must file form 706 Federal Estate Tax Return with the IRS.

Many financial advisors may not believe electing portability is necessary. However, it is. One estate planning attorney advises financial advisors and CPAs to obtain a written document affirming their decision from surviving spouses if they decline to elect portability.

The portability election is relatively recent to married farming couples. This is why many people in the agricultural sector may not be aware of it. The value of assets may be estimated to the nearest quarter million dollars at the first spouse’s death. An estate planning attorney can help the surviving spouse to file a Form 706.

Form 706 must be submitted to the IRS within nine months of the first spouse’s death. The deadline can be extended using Form 4768 for an additional six months. However, suppose the surviving spouse misses the initial deadlines for filing. In that case, they can still make the portability election up to five years from their spouse’s death by invoking “Relief under Revenue Procedure 2022-32.”

There were so many applications for extensions made to the IRS that in 2022, the change was made to give surviving spouses more flexibility in applying for the portability election.

This is a detail to be discussed with your estate planning attorney when preparing or reviewing your estate plan.

Reference: Ag Web (Jan. 30, 2023) “Use Portability to Avoid a Potential Multi-Million Dollar Estate Mistake.”