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More Time to Claim a Tax Benefit

For Americans who die in 2022, the amount exempt from the federal estate tax is generally $12,060,000. Each partner in a marriage has an exemption, so that a married couple could have a total exemption of $24,120,000 should they both die this year. What’s more, this tax benefit is now portable, that is, any port of the exemption not used at the death of a spouse may be inherited by the survivor, to be used in future years. 

Simplified example. Married couple John and Mary are worth $20 million. When John dies in 2022, he leaves his entire estate to Mary outright. That transfer is shielded from the estate tax by the marital deduction, so John has used none of federal exemption amount. Mary inherits his Deceased Spousal Unused Exclusion (DSUE) of $12,060,000, which her estate may use in future years to reduce her estate tax liability. Or she could use it to avoid gift taxes on large lifetime property transfers. 

But there is a catch—one has to ask for the DSUE to receive it, it’s not automatic. There’s only one way to claim the DSUE, and that is by filing an estate tax return for the first spouse to die, even though no tax will be due. 

This point has been frequently overlooked. When the oversight is later discovered, some estates have asked the IRS via a private letter ruling for permission to file a very late estate tax return so as to claim the DSUE. The IRS has taken a very taxpayer-friendly posture on this question. For estates smaller than the filing threshold ($12,060,000 in 2022) the Service has granted the extension of time. With larger estates, the tax code does not give the IRS the same flexibility. 

So many people were filing these private ruling requests that in 2017 the IRS announced that smaller estates that asked for the extension within two years of death would automatically get a favorable response, and did not need to go to the expense of a private ruling. However, that change did not make a big enough dent in the flood of requests. Recently the IRS extended the deadline to five years following the death of the spouse. The estate tax return must say on page 1 

“FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).” 

Why have so many estates realized belatedly that they have this issue? The fact that stock prices were, until this year, appreciating very nicely may have grown some estates into taxable territory, triggering the need for a DSUE. Also, the amount exempt from federal estate tax is scheduled to fall roughly in half in 2026 under current law. That change will not affect a DSUE secured in an earlier year. 

 

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