What the Portability Tax Change Means for HNW Clients

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.