Some people seek estate and wealth transfer strategies that preserve assets while providing lifetime financial…
It is Now Easier to Avoid Estate Taxes
The IRS adjusted the portability strategy of deceased spouse unused exclusions on July 8, 2022. This adjustment made it easier than ever for high-net-worth married couples to avoid paying federal estate taxes.
Understanding the Portability of a Deceased Spousal Unused Exclusion
The Deceased Spousal Unused Exclusion (DSUE) is federal tax legislation that permits a surviving spouse to claim unused exemptions from the estate taxes of their deceased spouse. This unused exemption is added to their own exemption balance. For married couples, it allows for the living spouse to make transfers beyond the annual tax-free exclusion and increases the total assets protected from estate tax once the surviving spouse passes.
Currently, there is a $12.06 million per person exemption on estate taxes and gifts for the 2022 year. This means that you won’t owe estate taxes when gifting up to $12.06 million to non-spouse beneficiaries or your children during your life or at the time of death. However, you can owe up to 40% on anything beyond the $12.06 million. Suppose a spouse dies. The surviving spouse can now elect portability and utilize the DSUE, meaning the couple can now gift up to $24.12 million without paying estate taxes.
In short, married couples opt to do this to protect their assets or money from being taxed. However, this does not automatically happen upon the death of a spouse. The surviving spouse must elect to do this.
Electing Portability is More Convenient Than Ever
Time is of the essence when electing the DSUE. Previously, the surviving spouse had to elect and file an estate tax return within nine months of the spouse’s death. If properly requested, there was a six-month extension option. Noting that there is a filing timeline is very important, as it can save heirs and surviving spouses thousands, if not millions, in estate taxes.
However, in 2017, the Department of Treasury began to allow estates under the estate tax exemption to make the election as late as two years after the descendant’s death. Now, effective as of July 8, 2022, the department extended this deadline to five years after death for estates who qualify. In addition to the extension, you will no longer need to undergo the expensive and time-consuming process of a private letter ruling from the IRS. These changes simplify the process of portability, making it much easier than ever before.
Who Should Be Paying Attention
While any adjustment in tax legislation affects all tax-paying citizens, some are more greatly affected than others. In this case, the recently adjusted portability strategy primarily affects married couples with a high net worth. However, there are specific circumstances in which this adjustment can significantly benefit an individual and their heirs.
This adjustment allows individuals who missed the two-year deadline to now file. It also may provide refunds for surviving spouses who assumed the portability election period had expired, so they filed a gift tax return or estate tax return regardless.
The deceased spousal unused exclusion can be a very valuable estate exemption that can save heirs thousands, if not millions, of dollars. Even with the recent changes to simplify the DSUE process, it is still highly recommended that you seek professional guidance to ensure that you fully understand this process. If you have questions or would like to discuss your personal legal matters, please don’t hesitate to contact us at (321) 729-0087.