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Financial Planning > Trusts and Estates

What the Portability Tax Change Means for HNW Clients

By Steve Wittenberg

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The IRS recently extended late portability election relief of the estate and gift tax exemption (aka “lifetime exemption”) for married couples expecting to owe federal estate taxes when the second spouse dies.

Previously, surviving spouses had two years from a partner’s death to elect portability of the lifetime exemption, but the latest IRS change extends the deadline to five years.

If the exemption is utilized properly, this change can provide flexibility and simplicity for both advisors and clients. So what do you and your clients need to know about this change, and should you be speaking to your clients about it today?

Who’s Impacted

Married high-net-worth and ultra-high-net-worth clients, predominantly those couples worth more than the joint lifetime exemption amount ($24.12 million in 2022), could be impacted positively by this change.

These clients fall into a taxable estate, but there are scenarios that draw in couples at other wealth levels too. For example, many clients may have already utilized some (or all) of the exemption during their lives through inter-vivos giving, so their remaining exemption may be lower than $24.12 million.

Further, the current all-time-high exemption rate is scheduled to be cut in half after December 31, 2025. Assuming this stays in place, clients worth anywhere from $12-24 million will also be impacted at that time.

But if you don’t have clients within this range, that doesn’t mean you shouldn’t be paying attention. Clients are accumulating wealth fast, and if you are working with an individual whose estate grows exponentially, you need to be thinking about and preparing for this exemption.

Outside of financials, the reality is that this is a mortality issue. Younger individuals don’t have to worry as much about this right now, but their advisors and estate planning professionals should always be thinking years, decades, and even generations ahead. So it’s important to keep track of frequently changing tax laws and how they may impact planning in the long term.

What to Tell Clients

If you have sophisticated, high-net-worth clients and want to position yourself as a holistic wealth planner, you are in a role that can provide insights across an individual’s entire financial life.

With any change, the first step is always to educate your clients about the benefits of the law changes. This rule change simplifies the extension process and opens up opportunities for a client to elect portability if their spouse passed between two and five years ago.

Previously, if the client missed the filing deadline, the only recourse was to ask the IRS for reprieve via a Private Letter Ruling, which is a time-consuming, expensive, and non-guaranteed process.

With this update, clients can now elect portability within the five-year period simply by filing an estate tax return, giving attorneys and CPAs a clear, streamlined process that may be cheaper and easier. You should also be having meaningful conversations with your client and the other financial professionals with whom they work.

Planning & Building Flexibility

The change doesn’t take away the importance of building out your clients’ estate plans, and it is critical to construct flexibility that fully takes advantage of the state exemptions. Prior to 2011, the concept of portability didn’t even exist in the law, so most estate plans used credit shelter or bypass trusts for surviving spouses to utilize the exemption.

Portability also does not extend to the Generational Skipping Tax (GST) exemption. That exemption is the same amount as the lifetime exemption, but it is an entirely separate allocation for assets that could skip a generation, going to the grantor’s grandchildren or beyond. If you fail to utilize your generation-skipping tax credit upon the first death, your client’s family may lose the credit completely.

There is power in helping your clients plan for their estate in the long term through multi-generational wealth planning. It’s important for advisors to be cognizant of the IRS’ latest change, which provides a safety net for financial professionals to work reactively after a client’s spouse has died.

But it is still good to remember that it’s not a replacement for a thoughtful and well-built estate plan that will set a client’s family up for success for generations to come.

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Steve Wittenberg is the director of Legacy Planning for SEI’s Private Wealth Management business. He provides tax, estate, philanthropy, succession planning, and family governance advice to ultra-high-net-worth and high-net-worth clients. 

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