New, Temporary Regulations Explain Estate Tax Portability Election
IRS has issued long-awaited temporary and proposed regulations providing guidance on the requirements for electing portability of a deceased spousal unused exclusion amount (“DSUEA”) to the surviving spouse, and on the rules for the surviving spouse’s use of this DSUEA.
Background on the portability election. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 added a new “portability feature” for estates of decedents dying after 2010 and before 2013, under which the applicable exclusion amount is the sum of (1) the “basic exclusion amount” (i.e., $5 million with an adjustment for inflation after 2011), and (2) in the case of a surviving spouse, the DSUEA. (I.R.C. § 2010(c)(2))
The DSUEA is the lesser of:
- (1) the basic exclusion amount, or
- (2) the excess of (i) the basic exclusion amount of the last deceased spouse of the surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under I.R.C. § 2001(b)(1) on the estate of such deceased spouse. (I.R.C. §2010(c)(4)).
A surviving spouse may use the DSUEA in addition to her own $5 million exclusion (as indexed) for taxable transfers made during life or at death, but if a surviving spouse is predeceased by more than one spouse, the amount of unused exclusion that is available for use by the surviving spouse is limited to the lesser of $5 million or the unused exclusion of the last deceased spouse. (I.R.C. § 2010(c)(4)). The DSUEA cannot, however, be taken into account by a surviving spouse unless the executor of the estate of the deceased spouse elects to do so by timely filing an estate tax return on which the DSUEA is computed. Once filed, the IRS has the authority to examine the estate tax return of the deceased, to make determinations with respect to the calculation of the DSUEA, even after the statute of limitations on assessment has expired.
Here are some of the highlights of the temporary regulations on the DSUEA.
Making the portability election. Treas. Reg. § 20.2010-2T(a), requires an executor electing portability to make that election on a timely-filed estate tax return. The last return filed by the return due date, including extensions actually granted, will supersede any previously-filed return. Thus, an executor generally may supersede a previously-filed portability election on a subsequent timely-filed estate tax return. The estate tax return must be filed within nine months of the decedent’s date of death, unless an extension of time for filing has been granted. A portability election is irrevocable once the due date (as extended) of the estate tax return has passed.
Filing of complete and properly prepared estate tax return. A number of commenters have asked the IRS for clarification of what was required under the Notice 2011-82 rule that the estate of a decedent (survived by a spouse) makes the portability election by timely filing a “complete and properly-prepared estate tax return” for the decedent’s estate. Commentators also asked for relief for estates that are not required to file a return, but are doing so only to elect portability of the decedent’s DSUEA.
In response, Treas. Reg. § 20.2010-2T(a)(7), provides that an estate tax return prepared in accordance with all applicable requirements is considered a “complete and properly-prepared” estate tax return. Executors of estates that are not otherwise required to file an estate tax return under do not have to report the value of certain property that qualifies for the marital or charitable deduction.
An executor who chooses to make use of this special rule in filing an estate tax return 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 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. By signing the return, the executor will be certifying, under penalties of perjury, that the estimate falls within the identified range of values to the best of the executor’s knowledge and belief.
Executor responsible for making portability election. The administrator that is appointed, qualified, and acting within the U. S. for the decedent’s estate (an appointed executor), may file an estate tax return to elect portability or to opt to have the portability election not apply. 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 elect portability or to opt to have the portability election not apply. A portability election made by a non-appointed executor cannot be superseded by a contrary election made by another non-appointed executor of that same decedent’s estate. (Treas. Reg. § 20.2010-2T(a)(6)).
How to opt out of portability election. Under Treas. Reg. § 20.2010-2T(a)(3), an executor must make an affirmative statement on the estate tax return signifying the decision to have the portability election not apply. If no estate tax return is required, not filing an estate tax return will be considered to be an affirmative statement signifying the decision not to make a portability election.
Use of the DSUEA by the surviving spouse. Under Treas. Reg. § 20.2010-3T(c)(1) and Treas. Reg. § 20.2010-2T(d)(1), a portability election made by the executor of a decedent’s estate is effective as of the date of the decedent’s death. Thus, the DSUEA of a decedent survived by a spouse may be included in determining the applicable exclusion amount of the surviving spouse, subject to any applicable limitations, with respect to all transfers occurring after the death of the decedent, if the executor of the decedent’s estate makes a portability election and the election is not superseded by the executor of the decedent’s estate before the due date of the return, including extensions.
Under Treas. Reg. § 20.2010-1T(d)(5), the term “last deceased spouse” referred to in I.R.C. § 2010(c)(4)(B)(i) means the most recently deceased individual who was married to the surviving spouse at that individual’s death, except that an individual dying before calendar year 2011 cannot be considered the last deceased spouse of such surviving spouse.
Other provisions. The Regulations also discuss the DSUEA where there are multiple spouses and previously applied DSUEAs, the IRS’s authority to examine returns of deceased spouses, applicability of the portability rules to nonresidents who are not citizens, and the applicability of portability in case of qualified domestic trusts.