It's So Important to Elect ‘Portability’ for Your Farm Estate
One of the most overlooked and misunderstood tax laws – available to married farming couples – is an opportunity called portability.
When one of the spouses dies, the surviving spouse can make a portability election. That means any unused federal gift or estate tax exemption can be transferred from the deceased spouse to the surviving spouse.
This is an election that has to be made proactively after the death of the first spouse, according to Polly Dobbs, owner of Dobbs Legal Group, Peru, Ind. It won't happen automatically. See your adviser for help.
“You have to file a Form 706 federal estate tax return within two years of death at the latest, even though there's no tax owed,” she explains.
Dobbs and Paul Neiffer, a certified public accountant (CPA) and principal with CLA, addressed the topic of portability during the 2022 Top Producer Summit.
Watch now: Practical Succession Planning Strategies from Your Favorite Attorney and CPA
Portability Election Is Available Through 2025
Under current federal law, portability is available for farm couples to implement through Dec. 31, 2025. At that point, the opportunity “sunsets” and the provision will no longer be available.
“But I am still just so shocked and disappointed by how many advisers don't understand portability and don't embrace it,” Dobbs says. “It could truly be a multi-million-dollar mistake if it's not elected.”
Neiffer points out that even after two years, the surviving spouse can elect portability (through the end of 2025), but he or she will incur considerable expense in the process.
“You can still file for it, but you will pay a user fee that’s about $12,000, and then you have to pay a (lawyer or adviser) to prepare the paperwork, and that’s probably another $10,000 to $15,000,” Neiffer says. “So, you’re going to pay between $25,000 and $50,000, whereas, if you’d just filed it within two years of your spouse’s death you could have avoided those high costs.”
A Look Back At The ‘Old Days’
Prior to portability being an option, it was common for husbands and wives to each own about the same amount of assets, or at least the amount of assets that could fully soak up and use each person’s exemption, Dobbs says.
“So, a lot of folks are used to seeing farms titled one-half with the husband, one-half to the wife – as tenants in common not husband and wife jointly,” Dobbs notes. “Because in the old days, if you didn't use the wife's exemption to cover her assets (if she died first), it would just expire and be gone.”
Now, with portability, all of the assets can flow through to the surviving spouse.
“At the first spouse’s death, the survivor files that portability election and then has two exemptions to cover assets,” Dobb says.
Dobbs shares some hypothetical examples she says are scenarios similar to ones she encounters frequently with clients. Here are two for consideration:
Scenario 1
Jane and Jed farm and are worth about $11 million; their assets are jointly owned. They have one son, Jimmy, who also farms. Jed dies in 2023 but because the assets are jointly owned, Jane doesn’t check in with her lawyer or CPA because by operation of the law she owns everything. No estate taxes are due at this point because of the unlimited marital deduction between the two spouses.
Now here’s when the problem that could have been avoided comes into play and takes a bite out of the family’s estate.
Jane dies in 2026. Because she didn’t file for portability when Jed died in 2023, the exemption available is only going to be $6 million. So the son, Jimmy, owes $2 million in estate tax.
Here’s how the math works: There was $11 million as the couple’s original assets but only $6 million for Jane's exemption. That leaves a $5 million taxable estate. At the current 40% tax rate, Jimmy is stuck owing $2 million in estate tax.
“This could have been totally avoidable if Jane had acted upon portability in 2023 when Jed passed away and filed a Form 706,” Dobbs says.
Evaluate Costs Versus Benefits
There is some cost associated with enacting portability and filing a Form 706. However, it’s likely a small expense compared to the dollar amount you will likely preserve.
“If you’re simply filing for portability, about $2,000 would cover your expenses most of the time,” Neiffer says.
“You’re paying $2,000 and saving $2 million in this case,” Dobbs adds. “That makes for a pretty easy cost-benefit analysis.”
Here’s another example Dobbs and Neiffer offer. It’s based on the same family and dollar amount in assets, but Jane elects portability.
Scenario 2
When Jed dies in 2023, Jane has the family CPA and lawyer help her file a Form 706 to elect portability. Jed has the $12.06 million exemption that he’s not using any of, so it transfers to Jane. When Jane dies in 2026, she's has her own $6 million exemption plus Jed’s $12.06 million exemption, which totals $18.6 million in exemptions. As a result, their son, Jimmy, will owe $0 in estate tax.
“This scenario could be even more powerful if Jane actually lives many years beyond 2026, and that $11 million estate grows closer to that $18.6 million,” Dobbs say. “If that happens, Jane’s going to be really glad she's got Jed’s $12.06 million exemption in her back pocket.”
Neiffer adds that farmers still need to take into consideration potential state estate taxes. There are 17 states that have estate taxes in place, and sometimes the amounts taxed can exceed federal amounts.
“Know what your state has in place, because we still use bypass trusts and other tools depending on the estate laws,” he says.
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