The IRS has issued temporary (T.D. 9593) and proposed (REG-141832-11) regulations to provide guidance on the new rule allowing portability of unused estate tax exclusions between spouses.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 amended Section 2010 to make the estate tax exemption portable between spouses. Section 2010(c) generally allows the surviving spouse of a decedent dying after December 2010 to use the decedent's unused estate tax exemption along with his or her own estate tax exemption. For example, if a decedent died in 2011 (when the estate tax exclusion amount was $5 million) with a taxable estate of $3 million, the decedent's estate could make the portability election and add $2 million of unused exemption to the surviving spouse's exclusion amount. Thus, the amendment eliminates the need for spouses to retitle property and create trusts solely to take full advantage of each spouse's estate tax exemption. As the law is currently in effect, the surviving spouse must use the deceased spousal unused exclusion (DSUE) amount by Dec. 31, 2012, either by gift or at death.
The regulations address various aspects of the portability election and of the surviving spouse's use of the DSUE amount. The text of the temporary regulations also serves as the text of the proposed regulations.
The portability election must be made by timely filing an estate tax return, which is due nine months after the date of the decedent's death unless an extension of time to file the return is obtained. The temporary regulations clarify that the estate tax return must be filed within this time period even if the estate would not otherwise be required to file a return (because the decedent's gross estate was less than $5 million for 2011 or $5.12 million for 2012). If the executor chooses not to make the portability election, the executor must make an affirmative statement on the estate tax return signifying the decision to not apply the portability election. If no estate tax return is required to be filed, failing to timely file a return is considered an affirmative statement not to make the portability election.
Once made, the portability election is irrevocable. The executor is responsible for making or forgoing the election. If there is no appointed executor, any person in actual or constructive possession of any property of the decedent (a nonappointed executor) may file the estate tax return to make or not make the election. A portability election made by a nonappointed executor cannot be superseded by a contrary election made by another nonappointed executor.
The estate tax return must be complete and properly prepared. The regulations state that if the estate is not otherwise required to file an estate tax return, the estate tax return does not have to report the value of certain property that qualifies for the marital or charitable deduction. In such a situation, the executor will be required to report only the description, ownership and/or beneficiary of such property along with the information necessary to establish the right of the estate to the marital or charitable deduction for this property. If the executor chooses this option, the executor must estimate the total value of the gross estate, based on a determination made in good faith and with due diligence regarding the value of all the assets includible in the gross estate. The executor must identify the particular range applicable to the gross estate from the ranges of dollar values that will be provided in the instructions to the estate tax return. Until the form and instructions are revised to include these ranges, the executor must include the best estimate of the total value of the gross estate, rounded to the nearest $250,000, on an attachment of the estate tax return, signed under penalties of perjury.
The regulations require the executor to compute the DSUE amount on the estate tax return, which eventually will be done on a prescribed form that is part of the estate tax return. Any estate that files an estate tax return before this form is issued will not be required to file a supplemental estate tax return to include this form, because there is sufficient information on a complete and properly prepared return to make the computation.
The computation of the DSUE amount is based on the basic exclusion amount in effect in the year of the death of the decedent whose DSUE amount is being computed. If the decedent paid gift tax on taxable gifts because the taxable gifts exceeded the applicable exclusion amount at the time of the gifts, these gifts are excluded from adjusted taxable gifts for purposes of computing the decedent's DSUE amount. This adjustment is necessary so that the decedent's exclusion amount is not used for amounts on which gift tax was paid. The regulations reserve on the issue of how the DSUE amount interfaces with other available estate tax credits (e.g., credit for tax on prior transfers under Section 2013, credit for foreign death taxes under Section 2014 and credit for death taxes on remainder under Section 2015).
If the portability election is made, the DSUE amount is available for the surviving spouse's use for transfers occurring after the decedent's date of death. The temporary regulations also address who is the "last deceased spouse." The last deceased spouse is the most recently deceased individual who was married to the surviving spouse at that individual's death, provided the individual died after Dec. 31, 2010. Remarriage by the surviving spouse does not affect who will be considered the last deceased spouse and does not prevent the surviving spouse from including in the surviving spouse's applicable exclusion amount the DSUE amount of the deceased spouse who most recently preceded the surviving spouse in death. The identity of the last deceased spouse is not affected by whether the estate of the last deceased spouse makes the portability election or has any DSUE amount available. When a surviving spouse has more than one deceased spouse, the temporary regulations apply an ordering rule. Any gifts made by a surviving spouse use the DSUE amount of the last deceased spouse (identified as of the date of the gift) before using any of the surviving spouse's own basic exclusion amount. The surviving spouse's DSUE amount then becomes the DSUE amount of the last deceased spouse (identified as of the date of a subsequent gift or the death of the surviving spouse) plus any DSUE amount actually applied to the surviving spouse's taxable gifts to the extent it was from a decedent who is no longer the last deceased spouse. Examples in the regulations illustrate the operation of these provisions.
The regulations confirm that the IRS may examine the returns of each deceased spouse of the surviving spouse in order to adjust or eliminate the DSUE amount. The IRS may assess additional estate tax on those prior returns only if the period of limitations on assessments is still open.
The temporary regulations also address the application of the portability rules when the decedent's assets are transferred to a qualified domestic trust (QDOT) for the benefit of a surviving spouse who is not a U.S. citizen. The decedent's estate tax is ultimately imposed under Section 2056A as distributions constituting taxable events are made from the QDOT. The tax generally equals the amount of additional estate tax that would have been imposed if the amount involved in the taxable event had been taxable in the decedent's estate (and not deductible as part of the marital deduction). The amount of estate tax that would have been imposed is computed by determining the net tax after the allowance of any credits including the applicable credit amount. Because portability is available to a surviving spouse only to the extent the decedent's exclusion amount is not used by the decedent's estate, the temporary regulations provide that the decedent's applicable exclusion amount is available to the decedent's estate until the decedent's final estate tax liability is computed. Consequently, the executor will compute a DSUE amount on a preliminary basis on the decedent's estate tax return for purposes of electing portability. This amount will subsequently be redetermined on the final distribution from the QDOT or other taxable event on which the estate tax under Section 2056A is imposed (e.g., death of the surviving spouse). The DSUE amount, if any is left, will be available for transfers occurring by reason of the surviving spouse's death and will be available in only limited circumstances for gifts during the surviving spouse's life.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.