Late Portability, GST Allocation, and Alternate Valuation
Elena, a Florida resident, died in 2024 with a gross estate of $14.5 million. Her husband, Carlos, died in 2021 with a gross estate of $9 million. Carlos's estate did not file a federal estate tax return because it was below the 2021 basic exclusion amount of $11.7 million. Elena's will leaves $2 million outright to her two children and the residue in a trust for her grandchildren. The trust is drafted as a GST trust. Elena's executor timely files Form 706. The executor asks whether Carlos's unused exclusion can still be used, whether GST exemption should be allocated to the grandchildren's trust, and whether the estate can elect alternate valuation under section 2032 because the assets declined by $1.2 million in the six months after death. Elena made no prior taxable gifts, and her 2024 exclusion is $13.61 million.
1. Can Elena's estate use Carlos's unused exclusion? What must be done?
Read the worked answer
Portability under section 2010(c)(4) ordinarily requires a timely filed Form 706 for the first spouse's estate. Carlos died in 2021, and his $9 million estate was below the $11.7 million exclusion, so no return was required. Rev. Proc. 2022-32 permits a late portability election for an estate that was not required to file and did not file, if the election is made within five years after the decedent's death. Carlos died in 2021, so a late Form 706 can still be filed within that window. Elena's executor should file a complete late Form 706 for Carlos and elect portability. Carlos's DSUE would be $2.7 million ($11.7 million minus $9 million). Elena's available exclusion would then be $13.61 million plus $2.7 million, or $16.31 million, which exceeds her $14.5 million estate. No federal estate tax would be due. The late return must be filed promptly and must satisfy the revenue procedure's requirements.
2. How should the executor allocate GST exemption, and what happens if no allocation is made?
Read the worked answer
GST exemption is separate from the estate tax exclusion, and portability does not increase it. Elena's 2024 GST exemption is $13.61 million. The $2 million outright to the children is a non-skip transfer, so no GST exemption is needed for it. The residue in the grandchildren's trust is a GST trust, and the executor should allocate GST exemption on Schedule C of Form 706. If the trust is fully exempt, later distributions to grandchildren will not incur GST tax. If no allocation is made, the automatic allocation rules under section 2632(c) may apply to some indirect skips, but the executor should not rely on them. Without an allocation, the trust's inclusion ratio may be 1, and future taxable distributions or terminations could be subject to GST tax at 40%. The executor should allocate enough exemption to cover the trust value, considering that the late portability election does not add GST exemption.
3. Can the estate elect alternate valuation under section 2032?
Read the worked answer
Section 2032 permits alternate valuation only if the election is made on a timely filed Form 706 and the election decreases both the value of the gross estate and the amount of federal estate tax due. Here the assets declined by $1.2 million, so the gross estate value would decrease. But after the late portability election, Elena's available exclusion exceeds her estate and no federal estate tax is due. The alternate valuation would not decrease the estate tax, because the tax is already zero. The election is therefore unavailable. The executor should not elect section 2032. If the estate had been taxable, the executor could compare the benefit of the lower values against the loss of the stepped-up basis and the effect on the DSUE calculation, but that analysis is unnecessary when no tax is due.