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Tuesday, June 19, 2012

Portability Regulations Offer Simplification and Clarification, Not a Short Form 706

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 On June 15th, the IRS issued long-awaited temporary and proposed regulations that provide guidance on the estate and gift tax applicable exclusion amount, including the requirements for electing portability of a deceased spousal unused exclusion amount (DSUEA) to the surviving spouse and on the rules governing the surviving spouse's use of the DSUEA. The IRS observed that the regulations cover the entirety of §§2010 and 2505 because there are no existing regulations under those sections.

Congress enacted the statutory provisions underlying the portability rules in 2010. These rules affect married spouses if the death of the first spouse to die occurs in 2011 or 2012. The IRS issued guidance on portability in Notice 2011-82, which, among other things, announced that a deceased spouse’s estate are deemed to elect portability of the DSUEA by timely filing a complete and properly-prepared estate tax return, and that such return is deemed to include a computation of the DSUEA until the IRS revises the estate tax return to expressly contain the DSUEA computation. The IRS also issued Notice 2012-21, which granted to certain qualifying estates a six-month extension of time for filing an estate tax return to elect portability.

Practitioners had hoped the IRS would create a simplified version of the Form 706 for estates under $5 million. Instead, IRS merely simplified the process by allowing executors of estates that need not otherwise file an estate tax return to avoid reporting the value of property that qualifies for the marital or charitable deduction. The 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 assets that need not be reported on the estate tax return under this provision. If a decedent’s estate does not wish to make the portability election, the executor must make an affirmative statement to that effect on the estate tax return. Estates that must file a tax return are deemed to have made the election by not filing a timely return. Estates making the election must do so within nine months of the decedent’s date of death. The election is effective as of the decedent’s date of death.

As to the method of computing the DSUEA, the IRS confirmed that the term “basic exclusion amount” means the basic exclusion amount in effect in the year of the death of the decedent whose DSUEA is being computed. Referencing the much-debated Example 3 in the portability discussion in the legislative history, the IRS interpreted the reference in §2010(c)(4)(B)(i) to the “basic exclusion amount” to mean the “applicable exclusion amount” and noted the regulations adopt this interpretation.

If the decedent's executor made a portability election, the regulations provide that, if the decedent is the last deceased spouse of the surviving spouse making a transfer subject to gift or estate tax, the surviving spouse (or his or her estate) of that decedent may claim that decedent's DSUEA in determining the surviving spouse's applicable exclusion amount in computing the surviving spouse's gift or estate tax liability on the transfer.

To clarify the §2010(c)(4)(B)(i) last deceased spouse limitation, the regulations provide that: (1) the “last deceased spouse” means the most recently deceased individual who was married to the surviving spouse at that individual's death, except that an individual dying before 2011 may not be considered the last deceased spouse of such surviving spouse; (2) remarriage alone will not affect who is considered the last deceased spouse and does not prevent the surviving spouse from including in his or her applicable exclusion amount the DSUEA of the deceased spouse who most recently preceded the surviving spouse in death; and (3) the identity of the last deceased spouse of the surviving spouse for portability purposes is not affected by whether the estate of the last deceased spouse elects portability of the deceased spouse's DSUEA or whether the last deceased spouse has any DSUEA available.

For further discussion of the portability election, see 800 T.M., Estate Planning.

Robert Herman, J.D.
Manager — Estates, Gifts and Trusts
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