IRS Issues Temporary and Proposed Regulations to Provide Guidance on Portability of Estate Tax Exclusion

Portability, a concept in which a surviving spouse is allowed to use a predeceased spouse’s unused applicable exclusion amount, was established by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“The Act”). Portability effectively doubles the amount that a married couple may pass on to their beneficiaries free of estate taxation. On June 15, 2012, the IRS issued temporary and proposed regulations to answer questions raised by the provisions included in the Act.

The Act provides for portability between spouses of the $5 million estate tax exemption amount, ($5,120,000, as indexed for inflation, in 2012) for estates of decedents dying in 2011 or 2012. This option is available only in the event that both spouses die after 2010, but before 2013. Under the portability provision of the Act, the unused portion of the last deceased spouse’s estate tax exemption is available to the surviving spouse, who may utilize such unused portion for both gift tax and estate tax purposes. The portability provision, however, is not available for generation skipping transfer (“GST”) tax or state death tax exemption purposes.

The portability concept differs greatly from the prior system, which did not allow for the surviving spouse to utilize the deceased spouse’s unused exemption amount, and often required the use of a By-Pass Trust or Credit Shelter Trust which added many levels of complexity.

In order to preserve the unused estate tax exemption amount for the surviving spouse, an election must be made on a timely filed estate tax return, Form 706, on behalf of the deceased spouse. Additionally, the portability benefit is limited to the unused estate tax exemption of the last deceased spouse of the surviving spouse. This rule is clearly aimed at avoiding “serial marriages” to accumulate unused exemptions and may have further implications if a surviving spouse decides to remarry and risk losing his or her prior spouse’s unused exemption amount, or in choosing remarriage based on the unused exemption amount.

Portability provides a permanent benefit for married couples. Use of portability, which requires an election, applies currently to the estate of a deceased spouse who died after December 31, 2010, and before January 1, 2013. The recently issued temporary regulations have the power to extend the applicability of this section until June 15, 2015. Further, any anticipated extension of reduced estate tax rates after 2012 will likely feature continued portability.

Updates to the portability clause within the temporary regulations are listed here:

• A portability election is now considered completed by the timely filing of a complete and properly-prepared estate tax return for the decedent’s estate. If the executor of the estate of a decedent with a surviving spouse does not wish to make the portability election, the new temporary regulations require the executor to make an affirmative statement within the estate tax return indicating that the portability election will not apply. If no estate tax return is required for that decedent’s estate, not filing a timely return will be considered to be an affirmative statement signifying the decision not to make a portability election.
• An executor must include a computation of the Deceased Spousal Unused Exclusion (DSUE) amount on the estate tax return of the decedent to allow portability of that decedent’s DSUE amount to the surviving spouse. Once the IRS revises the estate tax form to expressly include the computation of the DSUE amount, executors that previously filed an estate tax return pursuant to the transitional rule will not be required to file a supplemental estate tax return using the revised form.
• For the purpose of determining the DSUE amount, the IRS may examine returns of each of the surviving spouse’s deceased spouses whose DSUE amount is claimed to be included in the applicable exclusion amount, regardless of whether the period of limitations on assessment has expired for any such return. Upon examination, the IRS may adjust or eliminate the DSUE amount.
• A portability election is irrevocable once the due date (as extended) of the return has passed.
• If there is no appointed executor of the estate, any person in actual or constructive possession of any property of the decedent may file the estate tax return to elect portability or to opt to have the portability election not apply.
• There has been a significant ease of filing requirements for estates that fall below the applicable exclusion amount. Those estates that would normally not be required to file an estate tax return now only need to use estimated values for property that qualifies for the marital or charitable deduction. Not having to provide detailed values for property passing to surviving spouses or charities will make it more cost efficient for taxpayers to file this additional return.

Should you have any questions about this Tax Flash, please contact your Marcum Tax Advisor.