Recently, the IRS has been in the news for the wrong reasons. The Inflation Reduction Act provided new funding for the agency, and that could result in tens of thousands of new IRS agents. Not exciting news for any taxpayer.
However, I am bringing some good news regarding estate taxes and the IRS. Recent guidance will make it easier for surviving spouses to preserve unused estate tax exemptions after one spouse passes away.
Let’s do a quick estate tax refresher. Pretend Billy died in September 2022 and is survived by his spouse, Irene. For dying in 2022, Billy receives $12.06 million in federal estate tax exemption. If Billy is worth less than $12.06 million upon his death, no federal estate taxes are due. For each dollar over the exemption threshold, it is a 40% tax rate. The exemption amount is indexed to inflation and increases each year.
Billy’s estate ends up with a value of $7 million, leaving $5 million in unused estate tax exemption. Luckily, IRS rules allow Irene to file an estate tax return for Billy and add his unused $5 million exemption amount to her estate tax exemption amount. This process is called portability, and it could help save Billy and Irene’s heirs from costly estate taxes.
Under past IRS guidance, Irene had nine months from the date of death to file for portability, or 15 months if you requested an extension. Furthermore, the portability election required a comprehensive return to be assembled. That means appraisals, date of death values and accurate numbers were required to move the unused exemption from Billy to Irene.
New IRS guidance issued earlier this year is designed to help surviving spouses make the portability election. Instead of a 15-month filing timeline, surviving spouses can claim the unused exemption within five years of a spouse’s date of death.
Furthermore, the IRS relaxed the filing standards for the return, including no requirement for appraisals and amounts on the return can be rounded down to the nearest $250,000. The new rules apply to deaths that occurred on or after July 8, 2022.
This new set of guidelines can provide immense flexibility for farm families looking to manage estate taxes. Going forward the safest route for surviving spouses is to elect portability, preserve the unused exemption and maximize protection for family members. Keep in mind the higher estate tax exemptions sunset at the end of 2025 and will shrink to about $7 million to $8 million per person.
As always, consult with your tax and legal professionals for the best course of action for your farm and family.
Conklin is an attorney and new owner of Wright & Moore Law Co., LPA.