Sunday, June 17, 2012

IRS publishes regulations on portability of estate and gift tax exclusion

In December 2010, Congress and the President came to agreement on legislation that significantly but temporarily changed the federal estate, gift, and generation skipping tax (GST) rules. That law was named the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Public Law 111-312 (124 Stat. 3296, 3302) (TRUIRJCA). 
The Act set the estate tax at a significantly higher applicable exclusion amount of $5 million, and a lower maximum tax rate of 35 percent, than was set to occur. It also established a generous exemption from tax for lifetime gifts of up to $5 million. The estate tax regime created by TRUIRJCA is temporary and is set to expire as part of the "fiscal cliff" we may drive off at the end of 2012.
TRUIRJCA also provides for "portability" between spouses of the estate tax applicable exclusion amount for estates of persons dying in 2011 and 2012. Portability means that a surviving spouse can elect to take advantage of the unused portion of the estate tax applicable exclusion amount (but not any unused GST tax exemption) of the predeceased spouse, thereby providing the surviving spouse with a potentially larger exclusion amount upon his or her death. 
To preserve the first deceased spouse's unused exclusion amount (which is being referred to as the DSUE amount), the personal representative for such spouse must file an estate tax return to make an election even if filing a return would otherwise not be required.  
Although the current estate tax regime is set to expire it is widely assumed that any new law will re-enact TRUIRJCA's portability provisions. 
The IRS has now issued temporary regulations that provide guidance on the requirements for electing portability of a deceased spousal unused exclusion (DSUE) amount to the surviving spouse and on the surviving spouse’s use of this DSUE amount. The regulations are published in Federal Register for June 18, 2012. To review them go to and select Internal Revenue Service.  
Portability was intended to simplify estate planning, but it has also complicated estate administration.  As I have previously written “surviving spouses (and their lawyers) must now decide to whether to go to the expense of filing a federal estate tax return in order to preserve the DSUEA.” See Estate and Gift Tax Portability Law Creates some Unconventional Planning Opportunities. The regulations address the cost and burden associated with filing an estate tax return by simplifying the rules for establishing and substantiating the values reported for those estates that are not required to file a return but are filing just to elect portability of the decedent’s DSUE amount.
The regulations (in §20.2010-2T(a)(1)) specify that every estate electing portability of a decedent’s DSUE amount (even those not otherwise required to file) must file an estate tax return within 9 months of the decedent’s date of death, unless an extension of time for filing has been granted. However, executors of estates that are not otherwise required to file an estate tax return are given some relief from the costs that are involved in obtaining and reporting values for the certain assets in the gross estate.  
Executors will not have to report the value of certain property that qualifies for the marital or charitable deduction.  If an executor chooses to make use of this special rule in filing an estate tax return, the executor must estimate the total value of the gross estate (including the values of the property that do not have to be reported on the estate tax return under this provision), based on a determination made in good faith and with due diligence regarding the value of all of the assets includible in the gross estate.  The instructions issued with respect to the estate tax return (“Instructions for Form 706”) will provide ranges of dollar values, and the executor must identify on the estate tax return the particular range within which falls the executor’s best estimate of the total gross estate.  
This change should make it easier and less expensive for executors to pass the DSEU amount on to the surviving spouse.  
Other matters clarified in the regulations include:
·        If no estate tax return is required for a 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.
·        The appointed executor or administrator of an estate is the person authorized to make the portability election. But if there is no appointed representative, any person in actual or constructive possession of any property of the decedent may file the estate tax return to elect portability. §20.2010-2T(a)(6)(ii)). The regulations refer to such a person as a “nonappointed executor.”  
·        The regulations clear up some terminology confusion created by Section 2010(c)(4) of TRUIRJCA by interpreting that section to refer to the applicable exclusion amount, rather than the basic exclusion amount.

·        Section §20.2010-2T(c)(2) of the regulations provide that amounts on which gift taxes were paid by a decedent are excluded from adjusted taxable gifts for the purpose of computing that decedent’s DSUE amount.
·        The regulations in §§20.2010-3T(a) and 25.2505-2T(a) provide clarification on when the DSUE amount of a decedent is available to the surviving spouse or to the surviving spouse’s estate for use in determining the surviving spouse’s applicable exclusion amount. They provide that, if the decedent is the last deceased spouse of the surviving spouse on the date of a transfer by the surviving spouse that is subject to gift or estate tax, the surviving spouse, or the estate of the surviving spouse, of that decedent may take into account that decedent’s DSUE amount in determining the applicable exclusion amount of the surviving spouse when computing the surviving spouse’s gift or estate tax liability on that transfer. In addition, the temporary regulations in §§20.2010-3T(c)(1) and 25.2505-2T(d)(1) provide that a portability election made by the executor of a decedent’s estate is effective as of the date of the decedent’s death. 
·        The regulations provide guidance as to the scope of the last deceased spouse limitation in the portability law. A surviving spouse does not lose his or her DSUE by remarrying.  It is the act of surviving the second spouse’s death that destroys the DSUE received from the first spouse. (See regulations §§20.2010-3T(a)(3) and 25.2505-2T(a)(3)). The identity of the last deceased spouse of the surviving spouse for purposes of portability is not affected by whether the estate of the last deceased spouse elects portability of the deceased spouse’s DSUE amount or whether the last deceased spouse has any DSUE amount available. However, §25.2505-2T(a) provides that for purposes of determining a surviving spouse’s applicable exclusion amount when the surviving spouse makes a taxable gift, the surviving spouse’s last deceased spouse is identified as of the date of the taxable gift.  See §20.2010-3T(a) for a comparable rule for estate tax purposes.
·        §25.2505-2T(b) of the regulations creates an ordering rule by providing that, when a surviving spouse makes a taxable gift, the DSUE amount of the decedent who is the last deceased spouse of such surviving spouse will be considered to apply against the amount of the surviving spouse’s taxable gifts for that calendar year before the surviving spouse’s own basic exclusion amount will apply.  Under the rules in §25.2505-2T, a surviving spouse may use the DSUE amount of a predeceased spouse as long as, for each transfer, such DSUE amount is from the surviving spouse’s last deceased spouse at the time of that transfer.  Thus, a spouse who has survived multiple spouses may use each last deceased spouse’s DSUE amount before the death of that spouse’s next spouse, and thereby may apply the DSUE amount of multiple deceased spouses in succession.
·        In general the Portability Rules are not applicable to nonresidents who are not citizens. Regulation §20.2010-2T(a)(5) provides that an executor of the estate of a nonresident decedent who was not a citizen of the United States at the time of death may not make a portability election on behalf of that decedent.  Regulations §§20.2010-3T(e) and 25.2505-2T(f) provide that a nonresident surviving spouse who was not a citizen of the United States at the time of such surviving spouse’s death may not take into account the DSUE amount of any deceased spouse of such surviving spouse, except to the extent allowed under a treaty obligation of the United States. The regulations also provide some guidance as to portability when a qualified domestic trust (QDOT) is created for the benefit of a surviving spouse who is a not a citizen of the United States. Generally, the decedent’s DSUE amount will be available for transfers occurring by reason of the surviving spouse’s death, but generally will not be available to the surviving spouse during life.  Thus, in most cases a noncitizen spouse cannot use a DSUEA to shelter lifetime gifts.   
For further information see:
The Temporary Regulations and Notice of Rulemaking: Federal Register Vol. 77, No.117, June 18, 2012 (Scroll down to “Documents in Context” and select “Internal Revenue Service”).  

1 comment:

Mike Bishop7 said...

Thank you for sharing this news with us Jeff. I was reading articles online on tax debt relief because I have been hearing so much about it, that's how I found your blog. I'm happy I did because this was a very informative read about tax exclusion. Thank you again for sharing.