Because of changes made by the federal government to the portability requirements of the Internal Revenue Service, widows and widowers now have a longer time to file their taxes after the death of their spouses.
The term “portability” is defined as “the ability to transfer the deceased spouse’s unused exemption amount (DSUEA) for estate and gifts taxes to a surviving spouse,” which may be confusing to individuals who are not familiar with the specifics of estate law or with portability.
In the past, to qualify for the benefit, the surviving spouse was required to submit IRS Form 706 within 15 months after the date of the deceased’s passing. After that, in 2017, the window for submitting applications was extended to be valid for two years.
Because there were so many families that were going to miss the deadline by two years, the Internal Revenue Service (IRS) formally extended the filing window to five years from the date of death last week.
According to the Journal of Accountancy:
The deceased individual must have been a citizen or resident of the United States on the date of death to be eligible to use the simplified [five-year] method.
Additionally, the executor must not have been otherwise required to file an estate tax return under Section 6018(a), which is determined based on the value of the gross estate and any adjusted taxable gifts.
Additionally, the executor must not have timely submitted the estate tax return within nine months following the date of death of the decedent or within the extended filing deadline, whichever came first.
Even though this new, lengthier process for filing portability claims has definite long-term benefits — including less immediate hassle for widows and widowers and their adult children at all income levels — it also provides wealthy families with the ability to more easily shelter assets to avoid paying substantial estate taxes.
In a recent article, the Wall Street Journal discussed this topic in-depth and included the following incident that was provided by Bruce Steiner, a trusts and estates attorney based in New York City:
…[In a Steiner instance from September 2020] the father left his spouse with $3 million worth of stocks and other assets. Her estate is currently valued at around $6 million. According to Mr Steiner’s calculations, if she were to live another 20 years, she would very certainly fall under the scope of the estate tax.
For a younger widow like Mr Steiner’s client, who is in her mid-60s and has $6 million in assets, the decision to file for portability, according to tax pros, is an easy one to make. If she does not win the lottery, it is unlikely that it will make a difference for an elderly widow who is in the process of spending down her assets and has a net worth of one million dollars.
A problem with the appropriate procedures is mostly to blame for the fact that so many people fail to submit the appropriate forms.
According to Mr Steiner, there is no need for an estate administration if everything is simply transferred directly from one spouse to the other when the first one passes away. As a result, no one can identify the problem.
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It is something that “slips between the cracks,” as Mr Steiner puts it.
The new filing window of five years gives families wiggle room to protect their money, regardless of whether or not it appears prudent to do so at the moment.
According to Steiner’s explanation, “The risk-reward of the expense of performing the return is something but tiny compared to the cost if you’re wrong and the surviving spouse’s inheritance is otherwise above the exclusion amount when she dies.”
