Nobody likes filing a tax return that's not required. But sometimes it can pay.
Estate taxes aren't like income taxes. While married couples can file a joint 1040, there's no such thing as a joint estate tax return, for obvious reasons. Each spouse's Form 706 stands on its own.
Each Form 706 comes with a large lifetime exemption amount - $12,060,000 of assets for taxpayers dying in 2022. As any assets in an estate over the exemption are subject to a 40% estate tax, it's terrible for it to go to waste. But it's also easy:
Betty and Elmer live modestly. Elmer dies in 2022 with a net worth of $10,000, all from a small insurance policy he bought years ago. As it is far under the exemption amount, nobody thinks to file an estate return for Elmer.
Betty then buys a lottery ticket with the insurance proceeds and wins $25 million. Suddenly Betty has a potential estate tax problem.
It sure would be nice to be able to file a joint estate return here so Betty could use Elmer's $12.06 million exemption that otherwise goes to waste. But a "portability election" is the next best thing. A portability election transfers any unused exemption amount to the surviving spouse. Such an election could save Betty's estate about $4.8 million in estate tax.
To make the portability election, the estate of the first spouse to die must file a timely estate tax return, even if there is no estate tax owed. The due date for the estate tax return is nine months from the date of death, with the option of a 6-month extension.
What if no return was filed? Fortunately, there is a mulligan. If the estate misses the due date for the return, Revenue Procedure 2017-34 allows for a late estate tax return to be filed up to two years after the date of death to make the portability election.
Portability elections are especially important because under current law, the estate tax exemption is scheduled to drop in 2026 to around $5.5 million - the exact amount depending on inflation. That will greatly increase the number of taxpayers subject to estate tax - and it will make portability elections much more valuable in the meantime. To learn more, contact your Eide Bailly tax professional or Eide Bailly Wealth Transition Services.