On Tuesday, November 8, United States elections for the year 2022 were held. During this important midterm election, more than one-third of the seats in the Senate and all 435 seats in the House of Representative were contested. Now that the results are in, we know that Republicans will control the House and Democrats will retain control of the Senate come January. What does this mean for you and your clients?
With a Republican-controlled House and a Democratic-controlled Senate, it seems likely that any legislative action, outside of must-pass legislation such as funding the government, will come to a screeching halt. And negotiations on even the must-pass legislation will likely be factious, with each party seeing it as their only opportunity to pass policy.
GOP power in the House means Republicans will likely bring congressional investigations of certain people, policies, and corporations. For example, congressional hearings for the Justice Department’s handling of the Trump Mar-a-Lago investigations and telecommunications companies that cooperated with the January 6 committee seem likely. Republican members of the House have also signaled support for probes into Hunter Biden, the White House’s handling of the southern border, and President Biden’s withdrawal from Afghanistan. Some far-right members have also said they would try to launch impeachment proceedings against President Biden, although this effort would likely not get far because the Senate, which has sole power to conduct impeachment trials, is controlled by Democrats.
The Republicans’ agenda will likely include putting an end to Build Back Better, and they may also attempt to get spending cuts as concessions from the White House when the time comes to raise the cap on government spending in 2023.
On the other hand, Democrats will focus on what they can do with the Senate’s power: confirming federal judges and executive branch appointments. Since only a simple majority in the Senate is required to confirm judicial nominees for district courts, circuit courts, and even the Supreme Court, a Democratic Senate will be able to confirm more of President Biden’s choices.
The Democrats’ retention of a majority in the Senate also means that they can determine legislative priorities—Senate Democrats can set their own floor agenda and reject bills approved by the Republican-controlled House. They can also ensure that hearings and committee time are not used on investigations of President Biden and other members of his administration.
In reality, at this point all we can do is speculate until the new congressional session begins. With such uncertainty, it is important to make sure we are meeting with clients and keeping them up to date. Life events such as marriage, divorce, birth, and death can have a major impact on our clients’ lives and necessitate a review of their estate plan. It is up to us to remind our clients that comprehensive planning is not a one-and-done event. Although it appears that there are no substantial legal changes impacting our clients’ financial and estate plans today, we pride ourselves on being your source for relevant estate planning information and look forward to working with you into the next year.IRS Extends Late Portability Election
The IRS recently issued a new procedure (Revenue Procedure 2022-32) that extends the time an estate has to elect portability to five years after the decedent’s date of death. Since portability is probably not top of mind for you or your clients, let us take a minute to review what portability is and why this news could be very useful information.
What is the portability election?
In its simplest terms, portability is a procedure that allows spouses to combine their estate and gift tax exemptions by allowing a surviving spouse to use their deceased spouse’s unused exclusion (DSUE) amount. The surviving spouse then has their own exemption from estate and gift tax plus the unused exemption of their deceased spouse.
Example: Spouse 1 dies in 2022 when the exemption amount is $12.06 million. Spouse 1 used $2 million of their exemption amount to make gifts during their lifetime, leaving a DSUE amount of $10.06 million. Spouse 2 can elect portability to combine Spouse 1’s $10.06 million unused exemption amount with their own exemption amount.
What was the prior deadline, and why did the IRS issue a new deadline?
Prior to Revenue Procedure 2022-32, for estates not required to file an estate tax return, the deadline to elect portability was two years after the decedent’s death. (For estates required to file an estate tax return, the due date for the return is nine months after the decedent’s death, or if an extension has been obtained, the last day of the extension period, regardless of whether the estate elects portability.) However, the IRS was receiving a significant number of requests for private letter rulings from estates that did not meet the two-year deadline, placing a considerable burden on the IRS’s resources. The IRS observed that many of these requests were from estates where the decedent had died within five years of the request, thus prompting issuance of Revenue Procedure 2022-32, which extends the election period to five years after the decedent’s death.
Why might your client be filing late?
Because many couples own property jointly, when the first spouse passes away, the surviving spouse becomes the sole owner of their deceased spouse’s property by operation of law; thus, they often do not consult with any advisors at the first spouse’s death. If the value of the surviving spouse’s money and property is greater than their individual exemption amount, or if the value of their money and property increases after the death of the first spouse, then the surviving spouse’s individual exemption amount alone may not be enough to avoid the payment of estate taxes.
Example: Spouse 1 and Spouse 2 own property worth $10 million. Spouse 1 dies in 2022 when the estate tax exemption amount is $12.06 million. Because everything was owned jointly, all property automatically passes to Spouse 2 as the sole owner. Spouse 2 does not file an estate tax return to elect portability at Spouse 1’s death and does not have to because Spouse 1’s assets were worth less than Spouse 1’s remaining estate tax exemption amount. When Spouse 2 passes away in 2026, the exemption is approximately $6 million, and Spouse 2’s property is now worth $14.06 million, meaning that estate taxes will be owed on the $8.6 million not covered by Spouse 2’s exemption amount. If Spouse 2 had used the extended five-year period for electing portability to claim Spouse 1’s unused $12.06 million exemption amount, the entire estate could have been shielded from estate taxes (($14.06 million – $12.06 million) – $6 million = no estate tax due).
As an advisor, you have the critical role of analyzing the financial and tax situation of your surviving spouse clients to see if it would be beneficial for them to file a Form 706 to elect portability. We are here to assist you in that analysis should you have any questions.
