December 5, 2024
Portability Election (DSUE)
At GO, we understand that estate and transfer tax topics can be challenging and, at times, uncomfortable to navigate. Our goal is to support you with a comprehensive and forward-thinking tax strategy that aligns with your broader financial objectives. Through a proactive approach, we can help optimize your estate’s wealth, especially when valuable assets are involved, ensuring that you and your spouse’s legacy is preserved for future generations. A portability election can play a key role in minimizing estate tax liabilities and enhancing the value passed down to your beneficiaries.
WHAT IS PORTABILITY ELECTION?
Portability, also referred to as the Deceased Spouse Unused Exclusion (DSUE) election, is a provision under federal estate tax law that allows the surviving spouse to transfer any unused portion of the deceased spouse’s estate tax exclusion to themselves. This provision is crucial for maximizing the estate tax exemptions available to both spouses, thereby reducing the potential tax burden on the surviving spouse’s estate.
HOW PORTABILITY WORKS
When one spouse passes away and their estate is valued below the estate tax exclusion limit, the surviving spouse may apply the deceased spouse’s unused exclusion amount to their own estate.
For example, the basic exclusion amount in 2024 is $13.61M per individual. If the first spouse passes away and utilizes $3.61M of their lifetime estate and gift tax exclusion, the unused exclusion amount of $10M could be transferred to the surviving spouse by making the portability election.
WHY PORTABILITY ELECTION MATTERS
The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily increased the estate tax exemption, doubling it for tax years 2018 through 2025. After 2025, the exemption is scheduled to revert to an inflation adjusted $5 million per person unless further legislative action is taken.
Portability offers substantial benefits in minimizing or potentially eliminating estate taxes for the surviving spouse. By combining both the surviving spouse’s exclusion and the DSUE from the deceased spouse, the surviving spouse can significantly reduce the taxable estate.
Continuing the above example, presuming the first spouse’s estate had not filed the portability election, and the surviving spouse passes away in 2026 with an estate worth $15 million. If the exclusion is $5 million, the federal tax liability would be $4 million (40% of $10 million). However, had the portability election been made, the surviving spouse could have effectively increased the exclusion amount to $15 million, potentially eliminating any federal estate tax liability.
WHEN TO FILE
To make the portability election, the executor must file IRS Form 706 within 9 months of the decedent’s date of death, or within a 6-month extension period. Importantly, as of July 8, 2022, Revenue Procedure 2022-32 allows certain taxpayers an extended period of up to five years to make the portability election, providing more flexibility in planning.
CONCLUSION
This overview highlights the strategic value of the portability election as part of a holistic approach to estate and transfer planning. It is essential to work closely with your GO contact to assess your unique financial and tax situation, ensuring you take full advantage of the portability election before any potential changes to the law. Proper planning today can ensure a lasting legacy and more efficient wealth transfer to future generations.
Writer: Diem Bui, CPA, EA, MBA – Tax Manager
References
https://www.irs.gov/pub/irs-drop/rp-22-32.pdf
https://taxschool.illinois.edu/post/pros-and-cons-of-portability/