Ultrawealthy families with millions of dollars to leave behind as inheritances will save a lot on taxes thanks to the Internal Revenue Service’s latest portability rule.
Individuals can give up to $12.06 million tax-free to their children and other nonspousal beneficiaries during their lifetime or upon death, under limits for 2022. Anything above that is subject to a 40% tax (either known as a gift tax or estate tax, depending on when the money was handed over).
Spouses may transfer to their surviving spouse what’s left of the tax-free limit that they didn’t use, and they now have five years to do so, the IRS said in a ruling this month.
Previously, married couples had two years to file for this portability extension – that is, the allowance to transfer over any unused amount of the $12 million (known as the exemption) to the surviving spouse. To do so, individuals must file an estate tax return, which is typically due nine months after the decedent’s death.
Not everyone needs to file an estate tax return, and the surviving spouse of someone with less than the exemption amount of $12 million may not think it necessary since there would be no estate taxes due. But doing so gives the surviving spouse “portability” of the exemption should he or she ever need it.
“The IRS has observed that a significant percentage of these ruling requests have been from estates of decedents who died within five years preceding the date of the request,” the agency said in its ruling. The Treasury Department and the IRS have found this “considerable” number of ruling requests to indicate “a need for continuing relief for the estates of decedents having no filing requirement.”
For example, if a husband were to die in 2022 after having given $6 million to his children over his lifetime, he’d have about $6 million left he could have given without the money incurring taxes. If he leaves $3 million to his children in his will, that would be tax-free and shrink his exemption to $3 million. Whatever goes to his wife is tax-free.
With the portability rule, that leftover $3 million is added to his wife’s exemption amount to eventually pass on tax-free.
The exemption amount is inflation-adjusted, and in 2021 was $11.7 million per individual. The limit is expected to sunset in 2026, at which point it may be reduced to about $6 million.
This article was originally published on MarketWatch. It was written by Alessandra Malito, MarketWatch, and published in Barron’s on July 20, 2022.
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