John Stansbury is an Associate in Holland & Knight's Miami office

HIGHLIGHTS:

  • In June 2015, the Internal Revenue Service issued final regulations that provide general guidance with respect to the applicable exclusion amount, as well as certain requirements and rules with respect to portability of the deceased spousal unused exclusion (DSUE).
  • The DSUE amount is only portable to a surviving spouse if the return is filed within nine months of the deceased spouse's date of death, or the last day covered by any extension that may have been obtained.
  • The temporary portability regulations that were issued in 2012 will continue to apply to estates of decedent's dying on or after Jan. 1, 2011, and before June 12, 2015.

Portability of the deceased spousal unused exclusion (DSUE) amount between spouses was first introduced by Congress in December 2010, applicable to estates of married decedents dying on or after Jan. 1, 2011. Although originally scheduled to expire at the end of 2012, portability was made permanent as part of the American Taxpayer Relief Act of 2012. In June 2015, the Internal Revenue Service (IRS) issued final regulations that provide general guidance with respect to the applicable exclusion amount, as well as certain requirements and rules with respect to portability. More specifically, the regulations set forth the applicable requirements for electing the portability of the DSUE amount to the surviving spouse and the relevant rules for the use of the DSUE amount by the surviving spouse. The final regulations are effective as of (and apply to estates of decedent's dying on or after) June 12, 2015, and they largely implement the temporary regulations that were issued in June 2012, with a few clarifying changes.

Portability Election Requires Timely Filing

One clarification in the final regulations relates to the availability of an extension of time to make a portability election. The DSUE amount is only portable to a surviving spouse if an election is made on a timely filed estate tax return of his or her deceased spouse. The deceased spouse's estate must file the return within nine months of his or her date of death, or the last day covered by any extension that may have been obtained.

As clarified in the final regulations (Treas. Reg. §20.2010-2(a)(1)), an extension to elect portability will not be granted under Treas. Reg. §301.9100-3 to any estate that is required to file an estate tax return (i.e., where the value of the gross estate equals or exceeds the threshold amount in Section 6018(a)). However, such an extension may be granted to an estate that is not otherwise required to file an estate tax return (i.e., where the value of the gross estate is below the applicable threshold amount).

Protective Election Does Not Require Filing in Some Instances

The final regulations further clarify (Treas. Reg. §20.2010-2(b)) that there is no need to file for a protective portability election in situations where the deceased spouse's estate tax return is timely filed and "complete and properly prepared" in accordance with Treas. Reg. §20.2010-2(a)(7). Thus, if a timely filed estate tax return is "complete and properly prepared" with a DSUE amount of zero and there is no affirmative election out of portability, the executor is considered to have elected portability, and a subsequent adjustment that results in unused exemption of the deceased spouse would result in a DSUE amount available to the surviving spouse. In other words, there is need to file for a protective election. Notably, the IRS declined to elaborate on the circumstances in which a timely filed estate tax return would be so deficient as to render it incomplete for purposes of electing portability, instead opting to make such determinations on a case-by-case basis.

Also in issuing the final regulations, the IRS reconsidered, and again rejected, the suggestion to develop a condensed version of the estate tax return to be used by estates that are not otherwise required to file an estate tax return, but do so only for purposes of electing portability of the DSUE amount.

IRS Has Broad Authority Beyond Examining Returns

In addition, the IRS confirmed its position in issuing the final regulations that it has broad statutory authority under Section 2010(c)(5)(B) to examine the return of any deceased spouse when determining the DSUE amount allowed to the surviving spouse – even where the limitations period for examining the deceased spouse's return has expired. Thus, the examination authority of the IRS in such an examination is not limited to the reporting or valuation of assets on the deceased spouse's return. The authority of the IRS may extend to other legal issues that may impact the availability of the DSUE amount to the surviving spouse.   

Benefits for Surviving Spouse When Becoming a U.S. Citizen

In response to comments, the IRS included in the final regulations (Treas. Reg. §20.2010-3(c)(2)) a rule that specifically allows a surviving spouse who becomes a U.S. citizen after the death of his or her deceased spouse to take into account the DSUE amount of the deceased spouse. The surviving spouse is permitted to take the DSUE amount into account as of the date he or she becomes a U.S. citizen (such that it would apply for purposes of any subsequent lifetime transfers by the surviving spouse), provided that the estate of the deceased spouse made a portability election.

The temporary portability regulations that were issued in 2012 will continue to apply to estates of decedent's dying on or after Jan. 1, 2011, and before June 12, 2015.

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.