On July 8, 2022, the Internal Revenue Service (IRS) issued Revenue Procedure 2022-32 that expands the time allowed for estates of pre-deceased spouses to file an estate tax return to elect portability of the Deceased Spousal Unused Exclusion (DSUE). The IRS recognized that filing an estate tax return to report the DSUE to a surviving spouse is a costly and time-consuming process.
For those married taxpayers on the cusp of a taxable estate, the decision to file had to be made relatively quickly under the previous revenue procedures. Most taxpayers opted to file so as not to lose the pre-deceased spouse’s lifetime exemption, when perhaps one was not needed if they had additional time to consult with their advisors and do a full analysis of their facts and circumstances. The processing of these unnecessary returns created a significant burden on the IRS.
Further, the shorter time to file for portability meant that many estates missed the window causing them to request a Private Letter Ruling and obtain an extension to file. These Private Letter Rulings also placed a significant burden on already strained IRS resources. By issuing Revenue Procedure 2022-32 to extend the time to file for portability and to preserve the DSUE, the IRS hoped to relieve the burden on itself and taxpayers.
Background
Each taxpayer has a lifetime gifting and estate tax exemption they can use. In 2024, the amount is $13.61 million and is indexed for inflation. This amount will be cut in half when the current law sunsets at the end of 2025. Decedents with estates valued under the lifetime exemption are not required to file an estate tax return. Under previous law, any unused lifetime exemption would expire, and would require sophisticated estate tax planning involving trusts to preserve the DSUE.
Portability of the DSUE was first codified in 2010 and made permanent in 2012 by the American Taxpayer Relief Act. However, the new law required that an election had to be made for the surviving spouse to be able to use the DSUE. An election is made by filing a Form 706 for the decedent spouse despite there not being an estate tax liability. The filing of an estate tax return for DSUE is not a statutory due date in the IRC, but regulatory to be set by the IRS. This allows the IRS to establish the period for filing portability elections.
After the enactment of the new law, the IRS issued a string of revenue procedures to set the due date for filing DSUE Forms 706. The IRS started in 2014 with Revenue Procedure 2014-18 and modified those in 2017 with Revenue Procedure 2017-34. Not only did these provide a due date, but they also simplified procedures and qualification requirements for estates wishing to file for the DSUE.
Revenue Procedure 2022-32
In the spirit of the previous revenue procedures, the IRS kept many of the same requirements but extended the period to file the DSUE Form 706 to five years from the decedent’s date of death. The qualification requirements are as follows:
- Decedent was survived by a spouse, was a U.S. citizen or resident, and died after December 31, 2010.
- Decedent’s estate was not required to file an estate tax return, i.e., the decedent did not have a taxable estate (gross estate value and previous gifting values under the current lifetime exemption).
- An estate tax return was not filed in a timely manner.
- The election has to be made on complete and proper Form 706 that is filed on or before the fifth annual anniversary of the decedent’s death.
- The following statement is included on top of Form 706: “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).”
Additionally, if the new five-year window has passed or if the estate doesn’t meet any of the qualification requirements, the executor of the estate could still request a Private Letter Ruling (PLR) from the IRS in order to file a late DSUE Form 706. The PLR has a high user fee, and involves additional time as well as attorney and accountant fees. So, failure to file timely under this revenue procedure could be costly and time consuming.
Finally, if portability of the DSUE is successfully elected, the surviving spouse will have the use of the remaining exemption either for future gifting or to reduce or eliminate the estate tax at their death. It’s imperative that executors and planners go back and review estates of decedents with surviving spouses who passed less than five years ago and did not file DSUE Forms 706 to evaluate if these estates should consider filing. Changing circumstances such as the surviving spouse’s increase in net worth may warrant filing the DSUE Form 706.
Please contact your FORVIS Private Client advisor for more details regarding this important development for estates.