Effective July 8, 2022, the IRS issued Tax Procedure 2022-32 to replace Tax Procedure 2017-34 and now allows for a late tax exemption portability election of up to five (5) years to from the death of a deceased spouse. Previously, this window was only two (2) years from the death of the deceased spouse. Tax Proceeding 2022-32 allows for a larger window for a surviving spouse who may have missed out on or simply be unaware of the ability to transfer (or “carry”) the deceased spouse’s unused estate tax exemption (the “amount of ‘unused deceased spouse’s exclusion’ or ‘DSUE’) by filing a Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) (‘Estate Tax Return’) with the Internal Revenue Service (‘IRS’) The requirements are the same as under the previous tax procedure and include the following: (A) the deceased: (i) was survived by a spouse; (ii) died after December 31, 2010, and was a citizen or resident of the United States at his death; (B) the estate shall not be required to file an estate tax return; (C) an estate tax return was not filed in time appropriate; and (D) all waiver conditions under the tax procedure 2022-32 are satisfied.
The conditions for exemption under Tax Procedure 2022-32 are that an executor must file with the IRS a complete and properly prepared estate tax return on or before the fifth (5e) anniversary of the death of the deceased and the executor filing the estate tax return on behalf of the deceased declares at the top of the estate tax return that the return is “FILED UNDER REV. PROC. 2022 -32 TO CHOOSE PORTABILITY UNDER § 2010(c)(5)(A).
This simplified late election procedure is important because as of January 1, 2011, federal law allows the estate of a deceased spouse to transfer any DSUE to the surviving spouse for future use. Prior to this enactment of estate tax portability, the unused estate tax exemption of the first spouse to die was a “use it or lose it” proposition. A married couple who does not use the estate tax exemption of the deceased first spouse, either because the assets pass directly to a surviving spouse or because there are not enough assets in the estate of the first deceased spouse to use the inheritance tax exemption available to the deceased spouse, will not necessarily lose the benefit of the DSUE. Through a portability choice to transfer the EUSD to a timely filed estate tax return or late filed estate tax return pursuant to the terms of Tax Procedure 2022-32, the EUSD can be transferred to the surviving spouse .
It is important to note that the surviving spouse can use the EUSD for future gifts and/or to be applied to testamentary transfers upon their eventual death. With the enhanced five (5) year window, there will be more opportunities to take advantage of late-filed portability elections under Tax Procedure 2022-32 for taxpayers who may have overlooked this potential benefit or may not eligible within the previous two (2) years. the window.
However, if the five (5) year window for the 2022-32 tax proceeding has elapsed, the surviving spouse may still request late election relief in a Private Ruling Letter (“PLR”) from the IRS. Of course, PLR involves high user fees, more time and legal fees.