Effective July 8, 2022, the IRS issued Revenue Procedure 2022-32 to supersede Revenue Procedure 2017-34 and now allow for a late estate tax exemption portability election to be made up to five (5) years from a deceased spouse’s death.  Previously, this window was only two (2) years from the deceased spouse’s death.  Revenue Procedure 2022-32 allows a wider window for a surviving spouse who may have missed or just been unaware of the ability to transfer (or “port”) the deceased spouse’s unused estate tax exemption (the “Deceased Spousal Unused Exclusion Amount” or “DSUE”) by filing a Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) (“Estate Tax Return”) with the Internal Revenue Service (“IRS”).  The requirements are the same as under the prior Revenue Procedure and include the following: (A) the decedent: (i) was survived by a spouse; (ii) died after December 31, 2010 and (iii) was a citizen or resident of the United States on his or her death; (B) the estate must not be required to file an Estate Tax Return; (C) an Estate Tax Return was not timely filed; and (D) all the requirements for relief under Revenue Procedure 2022-32 are satisfied.

The requirements for relief under the Revenue Procedure 2022-32 are that an executor must file with the IRS a complete and properly prepared Estate Tax Return on or before the fifth (5th) anniversary of the decedent’s death and the executor filing the Estate Tax Return on behalf of the decedent states at the top of the Estate Tax Return that the return is “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).”

This streamlined late election procedure is important because since January 1, 2011, federal law has allowed a deceased spouse’s estate to port any DSUE to the surviving spouse for his or her future use.  Before this enactment of estate tax exemption portability, the unused estate tax exemption of the first spouse to die was a “use it or lose it” proposition.  A married couple that fails to utilize a first spouse to die’s estate tax exemption either because the assets pass outright to a surviving spouse or there are not sufficient assets in the first spouse to die’s estate to utilize the deceased spouse’s available estate tax exemption will not necessarily lose the benefit of the DSUE.  Through a portability election to port the DSUE on a timely filed Estate Tax Return or an Estate Tax Return filed late consistent with the terms of Revenue Procedure 2022-32, the DSUE can be ported to the surviving spouse.

Importantly, the surviving spouse can use the DSUE for future gifting and/or to be applied to testamentary transfers on his or her eventual death.  With the enhanced five (5) year window, there will be more opportunities to take advantage of late filed portability elections under Revenue Procedure 2022-32 for taxpayers who may have overlooked this potential benefit or potentially not qualified under the previous two (2) year window.

However, if the five (5) year window in Revenue Procedure 2022-32 has passed, the surviving spouse can still request late election relief in a Private Letter Ruling (“PLR”) from the IRS.  Of course, the PLR involves a high user fee, more time, and legal fees.

In our busy practice, we tend to see certain recurring errors. In particular, we see planning errors that arise during the estate administration process after someone dies. Below are a few of these common errors, and, in the spirit of, “An ounce of prevention is worth a pound of cure,” we also discuss steps that you can take to prevent them.

  1. Joint ownership and disclaimers. Spouses frequently title property they own (or savings, checking and investment accounts) as “joint tenants with right of survivorship.” Legally, this means that, upon the death of the first joint tenant, the asset passes by operation of law to the surviving joint tenant.

This type of ownership can be desirable, but it also means that property bypasses the Will, which can lead to adverse tax results. If a couple owns assets in excess of the federal exemption amount (currently $12.06 million but scheduled to be cut in half as of January 1, 2026), having all assets pass into the surviving spouse’s name can lead to an unnecessary estate tax at the surviving spouse’s death. This issue also arises in states that have a state level estate tax, such as New York.

The classic solution to this issue is to have the assets of the first spouse to die pass to a trust (often known as an “exemption trust” or “credit shelter trust”) so as to use the first spouse’s estate tax exemption. If assets are held jointly, however, the surviving spouse frequently has to “disclaim” the deceased spouse’s half of the assets so that they pass to this trust.

A disclaimer must be completed and filed within nine months of the deceased spouse’s date of death. It is easy to miss this deadline, or misunderstand what is at stake – ie, generally a 40% tax on one’s assets. The current law also allows for a surviving spouse to elect to take the deceased spouse’s estate tax exemption, which complicates the decision-making around this issue. The prudent planning step here is to be aware of the relevant deadlines and speak with a tax advisor to make the optimal decision.

  1. POD or TOD accounts. There is an appeal to “payable on death” or “transfer on death” account designations, and many financial advisors recommend them to clients. Accounts with this designation typically bypass the probate process and transfer on death to the named beneficiary.

However, such account designations are often undesirable. If a Will creates a trust or trusts for children, for example, the POD account will never go to the trust, frustrating the decedent’s intent. The POD beneficiary can have a creditor who will then be able to assert a claim against the account or asset. Also, the estate can owe taxes or have other expenses, and the POD accounts may not be available to be used for these obligations.

We frequently find that POD account designations have unintended consequences. The prudent step here is to be wary of POD designated accounts, carefully think through their effects in the overall estate, change them where necessary, and do not take title to the decedent’s assets until final decisions have been made.

  1. Not updating fiduciaries. Relationships change. People age. People move. These are just some of the reasons that the fiduciaries you chose a few years ago may no longer be appropriate in your estate planning documents. Examples: Mom names the oldest child as a fiduciary but late in her life, it turns out a caregiver child is the better choice. Husband names wife’s brother as a fiduciary, but then husband and wife get divorced and wife’s brother is no longer a good choice.

The prudent step here is that you should review your estate planning documents every few years and fiduciary choices should be kept current.

  1. Lack of immediate liquidity. Getting a Will admitted to probate and the executor appointed can take time. Some state courts are notoriously slow. If all of the decedent’s assets are frozen because the executor has not been appointed, there can be a cash or liquidity crunch in the estate. There are usually immediate bills to pay, including funeral expenses, medical bills, maintenance for a home, and more.

It is important to have some liquidity. Accordingly, the prudent step here is to think through the practicalities of what will occur if you pass away and whether your spouse, child or others have immediate access to funds. This can be accomplished, for example, by having a co-trustee on a revocable trust account, or having a small joint account that a family member or loved one can access.

  1. Digital records and passwords. At this point, we all have seen the stories of cryptocurrency owners who pass away without anyone knowing how to access their crypto account or digital wallet. Just like that, the value of the asset goes to zero. In addition, many people now choose paperless statements and only access their bank and investment accounts online. It is no longer effective that the family can scan the decedent’s mail for a few months and be confident that they have knowledge of all of the decedent’s assets.

The prudent step here is to keep an up-to-date list of accounts, including information such as the institution name, account number, title on the account, approximate balance and account passwords. In the age of two-factor authentication, it also may make sense to give a spouse or agent under a power of attorney his or her own access to the account. It also may make sense to maintain a list of other digital property, like e-mail accounts or photo storage (with passwords), which may have little monetary value but great sentimental value, so loved ones can access them.

We hope this discussion of some common errors we see in the estate administration process can help you avoid them.

In a recently decided case 3 University Plaza SPE, LLC v. City of Hackensack 5002-2014, 1670-2015, 3553-2016, 1163-2017, 3768-2018, 12891-2019 – 3 University Plaza SPE LLC, et al. v. Hackensack City (njcourts.gov) concerning a large 225,000 square foot class A office building, the Tax Court addressed the valuation community’s on-going debate as to whether certain reoccurring expenses (such as tenant improvement allowances and brokers’ commissions) should be treated as so called “above” or “below” the line adjustments when calculating the all-important net operating income of an asset.  Due to the fact that the Income Approach to value is the well-recognized leading methodology employed when dealing with income-producing properties, the determination of a property’s stabilized net operating income is critical to arriving at an appropriate and supportable fair market value determination.

Because the 3 University Court concluded that these categories of expenses are “in the competitive market” “annually reoccurring” operating expense and “needed to stabilize occupancy and preserve the value” of the property, they must be treated as “above-the-line” adjustments affecting net operating income.  In addition, because the Tax Court recognized that the major industry surveys report capitalization rates based upon the survey participants’ treatment of tenant improvement allowance and brokers’ commission expenses as “below-the-line” adjustments, (therefore not impacting net operating income), these surveys (e.g., American Council of Life Insurers Investor Bulletin Tables and PwC Real Estate Investor Survey) cannot be relied upon in concluding appropriate capitalization rates for use in the Income Approach valuation method.

On the other hand, the Band of Investment technique for deriving capitalization rates is a method that relies upon market determinations of appropriate mortgage interest rates and equity dividend rates, neither of which are directly impacted by a property’s net operating income and the divergent treatment of tenant improvement allowance expenses or brokers’ commissions.  As such, the Court concluded that the Band of Investment technique “provides the most accurate and reliable method of deriving a capitalization rate because it is not polluted or impacted by questions of how potential survey recipients perceived hypothetical transactional questions or how a market perceives an annually reoccurring operating expense.”

As a result, the Tax Court’s holding in this case, although a trial level decision and not binding on other courts, does provide a well-reasoned analysis and approach that should serve to better guide the valuation community as to best practices when determining stabilized net operating income and fixing appropriate capitalization rates  — two integral components of the Income Approach to value.

The IRS released Revenue Procedure 2021-45 which announces the increase in 2022 of the estate, gift and generation-skipping transfer tax applicable exclusion amounts from $11.7 million to $12.06 million.  The applicable exclusion amounts currently remain scheduled to expire on December 31, 2025, which would result in a reduction in the exclusion amounts to $5 million (adjusted for inflation).  However, there is always a possibility that new law will be passed that could adjust these exclusion amounts sooner.

In addition, in 2022, the gift tax annual exclusion amount for gifts to any person (other than gifts of future interests to trusts) will increase to $16,000, while the gift tax annual exclusion amount for gifts to a non-citizen spouse will increase to $164,000.

The New York basic exclusion amount will also increase in 2022 from $5.93 million to $6.11 million.

The Connecticut estate and gift tax applicable exclusion amount will increase from $7.1 million to $9.1 million in 2022.  This amount remains scheduled to meet the federal estate and gift tax exclusion amount in 2023.

We have had several matters recently with “Accidental Americans” – that is, non-US persons who became US tax residents by staying in the US for a sufficient number of days.

This frequently happens in an understandable way, and involves a non-US person who has family in the US. The non-US person comes to visit his or her family in the US for some period of time every year. He or she may stay for a few months at a time. With covid, medical or other reasons, he or she may have stayed for a longer period of time recently. And then, at some point and usually unwittingly, the non-US person satisfies the “substantial presence” test for US tax residency.

The “substantial presence” test is a day count test.  If a person is present in the US for 183 days or more in a calendar year, then he or she meets the substantial presence test and is treated as a US tax resident for US income tax purposes.

Also, if a person is present at least 31 days during the current calendar year, and those days, plus 1/3 of the days present during the preceding calendar year, plus 1/6 of the days present during the second preceding calendar year is equal to or greater than 183 days, then the person also meets the substantial presence test.

There are possible exceptions to the substantial presence test.  The exceptions include (1) the “closer connection” test, (2) the “exempt individual” test and (3) the “treaty tie-breaker” test.  These tests are not described in detail in this post.

The substantial presence test is important because a person who is a US tax resident must pay US tax on all of his or her worldwide income (subject to a credit for foreign taxes paid), whereas a non-US person is only taxed on his or her US source income.  Being subject to US tax on worldwide income can be an unwelcome surprise for an Accidental American.  One consequence of this test is that, if a person is in the US every year (eg, seasonally), he or she should be present for fewer than 121 days each year to avoid the rule.

In addition, a US tax resident also must comply with relatively complex tax reporting requirements for his or her foreign assets.  These include:  (1) foreign bank account reports (Form FinCen114) to report foreign bank accounts, (2) Form 8939 to report “specified foreign financial assets,” (3) Form 5471 for “controlled foreign corporations and (4) other possible reporting forms.

The penalties for not filing these information returns can be substantial.  On the other hand, the penalties can be abated if the taxpayer has “reasonable cause” for the non-filing.

Becoming an Accidental American also can mean exposure to state income tax.  For example, a non-US resident who spends sufficient days in New York also may owe New York income tax on his or her worldwide income.

Individuals in this type of situation should consult a tax professional to review their tax residency issues carefully.