There is now an opportunity for surviving spouses to take advantage of the higher Estate Tax and GST Tax Exemptions before they sunset in 2026. On Friday, July 8, 2022, the IRS released Revenue Procedure 2022-32, which supersedes Revenue Procedure 2017-34 and extends the period certain estates must make a “portability” election under IRC § 2010(c)(5)(A).

Who Must to File an Estate Tax Return?

The Estate Tax Return is filed for two types of Estates. The Estate Tax Return is required to be filed[1] for Decedents with a gross estate (plus any taxable lifetime gifts) that exceed the Estate and GST Tax Exemption  in the year of their death, or in the case of funding certain types of trusts. The Estate Tax Return is not required for Decedents when the gross estate and taxable lifetime gifts is less than the Estate and GST Tax Exemption in their year at death.  

Who Should File an Estate Tax Return

The 2010 Tax Act permits a surviving spouse to inherit the unused Deceased Spouse’s Unused Exclusion Amount (DSUE) by filing an Estate Tax Return. Therefore, Estates with a net worth below the estate tax exemption in the year of the Decedent’s death, may file an Estate Tax Return to elect portability and transfer the DSUE to the surviving spouse (“Portability Return”).

Anyone whose spouse passed away within the last five years with a current net worth greater than $5M should consider filing an Estate Tax Return to Elect Portability. The Tax Cuts and Jobs Act of 2017 (TCJA) doubled the estate, gift, and generation skipping transfer tax exemption and will expire January 1, 2026. Unless Congress passes a new law prior to the expiration of the TCJA, the estate, gift, and generation skipping transfer tax exemption will return to its base of $5M with an annual adjustment linked to the consumer price index. The number of Estate Tax Returns filed was reduced tremendously by the TCJA and will likely increase upon its expiration.

When Does an Estate Tax Return Need to Be Filed?

The Estate Tax Return is due nine months from the Decedent’s date of death. You may file for an automatic 6 month extension by filing IRS Form 4768. For purposes of filing a Portability Return only, the IRS also established an automatic extension two years from the Decedent’s date of death.[2] If the Estate did not file within that two year period, then a Private Letter Ruling from the IRS would be required to submit the late Portability Return as a special case exception.

Now, under Revenue Procedure 2022-32, Estates will have five years from Date of Death to file a Portability Return. This is an opportunity for surviving spouses to file a Portability Return before the Estate Tax and GST Tax Exemption is reduced.

The Decedent must meet the following requirements to file a Portability Return:

(i) Survived by a Spouse

(ii) Passed away after December 31, 2010

(iii) Resident or Citizen of the United States

(iv) Not required to file an Estate Tax Return under IRC Sec. 6018(a)

(v) Decedent’s Estate did not previously file an Estate Tax Return.

An example of the Potential Portability Return Opportunity

I had assisted a surviving spouse with the probate of her husband’s Estate last year (2021). Harry passed away in 2019 with a taxable estate of $4M. Harry’s Will transferred his $4M Estate to Wanda. The Estate  and GST Tax Exemption Amount in 2019 was $11,400,000. There was not a requirement to file an Estate Tax Return because Harry’s taxable estate was less than the Exemption Amount.

Wanda missed the six month deadline to file a Portability Return when we completed the probate matter. However, Wanda should consider filing the Portability Return to “inherit” the unused portion of Harry’s Exemption Amount or $7,400,000 ($11,400,000 – $4M).

If the Estate Tax Exemption is reduced in 2026 when Wanda hypothetically passes away with a Taxable Estate of $9M, her children could be forced to pay $1, 080,000 in Estate Tax. However, if Wanda filed an Estate Tax Return to Elect Portability within five years of Harry’s passing, Wanda’s children could “stack” Harold’s DSUE and Wanda’s Exemption Amount together to avoid paying Estate Tax.

These materials are made available by Stibbs & Co., P.C. for informational purposes only, do not constitute legal or tax advice, and are not a substitute for legal advice from qualified counsel. The laws of other states and nations may be entirely different from what is described. Your use of these materials does not create an attorney-client relationship between you and Stibbs & Co., P.C. The facts and results of each case will vary, and no particular result can be guaranteed. The facts and results of each case will vary, and no particular result can be guaranteed.

[1] IRC § 6018(a)

[2] Revenue Procedure 2017-34

[3] See Tax Policy Center – How many people pay the estate tax? | Tax Policy Center

Last Week, the House Ways and Means Committee proposed a draft bill which included major changes to our estate tax limits and our existing estate planning strategies.  Below is a breakdown of all major changes. Keep in mind all proposed changes are subject to change, as this bill has only just been proposed by the House and has not gone through any Senate review.

1. 1. Reducing the estate and gift tax exemption from $11,700,000 to $6,020,000 per person, effective January 1, 2022.
   2. Eliminating valuation discounts in gifting passive, non-business-related assets (family limited partnerships, etc.), effective once the bill is enacted.
   3. Subjecting grantor trusts to estate tax – thus, limiting the effectiveness of GRATs, QPRTs, SLATs and insurance trusts, effective once the bill is enacted.

Estate and Gift Tax Exemption Changes

Currently, each individual can transfer up to $11,700,000 without incurring a federal gift, estate or generation-skipping transfer (“GST”) tax.  The draft bill would reduce each exemption amount to $6,020,000 at the beginning of next year. This reduction is important for any client considering using up their exemption this year.  Before December 31, 2021, a client can transfer $11,700,000 without incurring a federal transfer tax (and a married couple that agrees to “split” the gift can transfer up to $23,400,000). 

Valuation Discount Changes

Clients who own interests in hedge funds, private equity funds, family partnerships or LLCs often wish to gift a portion of their interests to a trust for their descendants.  These gifts have typically been able to benefit from significant discounts for lack of control and lack of marketability.  These discounts arise because a third-party willing buyer would pay less for a minority interest in an entity where the buyer lacks control and holds only a minority position.  The draft bill removes any valuation discount for entities that hold passive assets. 

Grantor Trust Taxation

A “grantor trust” is a trust that is disregarded for federal (and sometimes state) income tax purposes, meaning that the “grantor” (or creator) of the trust pays all income tax on behalf of the trust.  Yet, trust assets are not “included” in the grantor’s estate for federal estate tax purposes, meaning that the trust is not subject to federal estate tax on the grantor’s death.  This type of trust allows assets to appreciate income tax free for the beneficiaries. 

The draft bill adds new sections to the Internal Revenue Code that would change the use of grantor trusts in three important ways:

• • A grantor trust would be included in the “deemed owner’s” taxable estate, the appreciation on the gift to the grantor trust is included in the grantor’s estate.
  • Any distribution from a grantor trust to a trust beneficiary will trigger gift tax, unless the beneficiary is the grantor’s spouse or a minor child of the grantor.
  • Asset sales to the grantor trust by the deemed owner would incur federal income tax in the same manner as if the deemed owner sold assets to a third party. 

After enactment, the following estate planning opportunities become either less desirable or even unavailable: (a) funding grantor retained annuity trusts (“GRATs”) or qualified personal residence trusts (“QPRTs”), (b) funding spousal lifetime access trusts (“SLATs”) and (c) funding irrevocable life insurance trusts (“ILITs”).

It’s time to act on your Estate Planning.

 Prior to the enactment date of the draft bill, SLATs, GRATs, QPRTs and other grantor trusts are still available options for estate planning with all of the benefits as we have known them.  In addition, if you have existing trusts and are considering making changes to their terms through decanting, now is the time to do it. If you were considering making any significant gifts, you have until the end of the year to make those decisions.

These materials are made available by Stibbs & Co., P.C. for informational purposes only, do not constitute legal or tax advice, and are not a substitute for legal advice from qualified counsel. The laws of other states and nations may be entirely different from what is described. Your use of these materials does not create an attorney-client relationship between you and Stibbs & Co., P.C. The facts and results of each case will vary, and no particular result can be guaranteed. The facts and results of each case will vary, and no particular result can be guaranteed.