Many families strive to build wealth for themselves, their children, and future generations. Congress recognized this reality by enacting the federal gift and estate tax portability election as part of the 2010 Taxpayer Relief, Unemployment Insurance Reauthorization, and Job Creation Act (also known as the 2010 Tax Relief Act) and making it permanent in the American Taxpayer Relief of 2012. These two laws provide married couples with a straightforward way to shield more of their wealth from federal gift and estate taxation.
In 2019, the State of Maryland provided further assistance to its residents striving to build wealth by enacting an estate tax portability election for surviving spouses as part of sweeping changes to the Maryland estate tax regime (note: Maryland does not have a gift tax).
In sum, if you are a Maryland resident and have recently lost your spouse, it is important to consider whether you should take advantage of both the federal and Maryland portability elections.
What Is Portability of the DSUE?
In 2023, the federal estate tax exclusion amount is $12.92 million for individuals and $25.84 million for married couples, and only gross estates that exceed these amounts are subject to estate tax. The Maryland estate tax exclusion amount is $5 million for individuals and $10 million for married couples. Due to the unlimited marital deduction, married couples with large estates can avoid estate taxes at the death of the first spouse. However, at the death of the surviving spouse, their estate, including the amount that they inherited from their spouse, will be subject to estate taxes if the gross estate of the second spouse to die exceeds their individual estate tax exclusion amount.
Prior to the enactment of the federal portability election in 2010 and the Maryland portability election in 2019, the unused exclusion amount of the first spouse to die was lost in the absence of complex planning (i.e., forming a bypass/credit shelter trust with the deceased’s money and property equal to their remaining lifetime exclusion amount), meaning the couple’s children would inherit less of the couple’s wealth at the second death because only the surviving spouse’s remaining lifetime exclusion amount was available to reduce the estate tax that had to be paid. The federal and Maryland portability elections now allow the surviving spouse to add the deceased spouse’s unused exclusion (DSUE) amounts to their own exclusion amounts to reduce or eliminate estate tax liability when they die.
How Do You Elect Portability?
To take advantage of portability of the DSUE amounts, the surviving spouse must file a federal estate tax return (Form 706) and a Maryland estate tax return (Form MET-1) after one spouse dies and make a portability election on those tax returns that allocates the DSUE amount to be applied to the surviving spouse’s subsequent transfers during life or at death. Portability must be elected properly, or the election will be ineffective. Therefore, it is critical to seek the assistance of an attorney or tax professional.
If the deceased spouse’s gross estate exceeds the basic exclusion amount ($12.92 million for 2023), a federal estate tax return must be filed within nine months of the date of death (a six-month extension is available to file the return but not to pay the tax). Likewise, if the deceased spouse’s gross estate exceeds the Maryland exclusion amount ($5 million), a Maryland estate tax return must be filed within nine months of the date of death (again, a six-month extension is available to file this return but not to pay the tax). To take advantage of the DSUE amount, the personal representative of the deceased spouse’s estate must elect portability and compute the DSUE amount on the timely-filed estate tax returns.
Further, it is important to understand that even if the deceased spouse’s estate does not exceed the federal or Maryland exclusion amounts and the personal representative is not otherwise required to file either estate tax return, the estate tax returns must be properly and timely filed to elect portability. First, in 2017, the IRS provided a simplified method for obtaining an extension of time to the second anniversary of the decedent’s date of death to elect portability. Then, in July 2022, the IRS extended the time for estates that are not otherwise required to file an estate tax return to make a portability election from the second to the fifth anniversary of the decedent’s date of death and provides a simplified method for obtaining the extension. Using the simplified method, a personal representative who wants to elect portability and has not yet filed an estate tax return—and was not otherwise required to do so—only needs to file a “complete and properly prepared” estate tax return (Form 706) that states at the top that it is “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).” The five-year deadline and simplified process make it easier and less expensive for the surviving spouse to take advantage of their deceased spouse’s unused exclusion amount, which could reduce or even eliminate federal estate taxes upon the death of the surviving spouse.
As of the writing of this article, Maryland law provides that a Maryland portability election must be filed with 2 years of the first spouse’s death. See MD Code, Tax – General, § 7-305(c). Thus, the newer 5-year federal extension for portability is only helpful to surviving spouses that reside in states with no state-level estate tax.
Why Should You Consider Electing Portability?
Although preparation of the estate tax returns may appear like an unnecessary expense if your deceased spouse’s money and property are not currently subject to either federal or Maryland estate tax, please bear in mind that your wealth could grow substantially before your death, and the DSUE amount could be used to shield wealth that otherwise would be subject to estate taxes. In addition, although the current federal estate tax exemption amount is historically high, it is scheduled to be reduced by approximately 50% at the end of 2025. So, in less than 3 years, more estates will be subject to federal estate tax liability unless the law is changed.
How MM&C Estate Planning Attorneys Can Help
Portability is an important and valuable strategy to minimize your estate taxes. Please contact us if we can help you to determine if you should take advantage of a portability election, especially considering the sunset of the doubled federal gift and estate tax exemption amount at the end of 2025.
Schedule a Meeting
Let us help you choose the best course of action to update your estate plan. If you have questions about portability or would like to discuss other ways we can safeguard you, your loved ones, and your life savings when you can no longer manage your affairs, call us to schedule an appointment.
We are more than happy to meet with you by phone, video conference, or in-person.
David Lucas is an attorney in the Estates & Trusts practice groups at Miller, Miller & Canby, licensed to practice in Maryland and the District of Columbia. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning. Contact David at 301.762.5212 or via email. To learn more about Miller, Miller & Canby’s Estates & Trusts practice click here.