The IRS gives wealthy clients more flexibility in filing Estate Tax Returns
On July 8, 2022, the IRS issued a ruling which allows wealthy couples to take advantage of certain provisions in the Estate Tax Code.
The Estate Tax is a tax imposed on high net-worth estates. As of this writing, each individual American is given a credit of roughly $12 million before the Estate Tax is imposed. This means that any person under that $12 million credit amount will not owe an Estate Tax upon their death. This $12 million credit is oftentimes referred to as the Lifetime Exemption Amount.
Because the tax code favors married couples, when the first spouse dies (the "Decedent Spouse"), the entirety of his estate is transferred to spouse (the "Surviving Spouse") tax free. Therefore, no Estate Tax is owed upon the death of the Decedent Spouse. This rule is known as the Unlimited Marital Deduction.
The Unlimited Marital Deduction presents creative planning opportunity for wealthy clients. First-and-foremost is the availability of "Portability" between the spouses. Portability refers to the ability of a married couple to essentially double their individual Lifetime Exemption Amounts so that an Estate Tax is now owed if the couple has less than $24 million in their combined Gross Estates.
For example, let's assume that the Decedent Spouse has a Gross Estate worth $20 million upon his death. The Surviving Spouse is not quite as wealthy; she has an individual Gross Estate of $2 million. Using the Unlimited Marital Deduction, the Surviving Spouse can inherit the entirety of the Decedent Spouse's $20 million without the imposition of the Estate Tax. Now her estate is worth $22 million. As long as she files with the IRS to take advantage of the Portability rules in a timely manner, she can use both the Decedent Spouse's, and her own, Lifetime Exemption Amounts of $12 million so that an Estate Tax is not owed if they have combined Gross Estates of less than $24 million. If she does not file for Portability under the time limits set by the IRS, she will lose the ability to double her Applicable Exclusion Amount (her Lifetime Exemption Amount plus the Decedent Spouse's Lifetime Exemption Amount).
This may seem a little convoluted, but just know that Portability allows wealthy couples to avoid Estate Taxes on combined Gross Estates under $24 million.
In a 2017 ruling, the IRS granted the Surviving Spouse 2 years to elect Portability for the Decedent Spouse's estate. This meant that she had to file a form with the IRS to receive tax free treatment of up to $24 million within 2 years of the Decedent Spouse's death.
Under a new rule by the IRS which came out in July 2022, the IRS has extended the 2 year election period to 5 years. This is a huge win for wealthy clients. Many don't realize the timing requirements for filing Estate Tax Returns and electing for Portability. If they don't pay special attention to the rules, or don't call a lawyer who can help with this matter, they may not be able to take advantage of the $24 million tax-free credit they are entitled to.
While The Taormina Firm does not prepare Estate Tax Returns at this time, we have resources and connections for those clients in need of filing Estate Tax Returns and taking advantage of the Portability rules under the Estate Tax Code. If you have any questions, please feel free to contact The Taormina Firm.