Estate Planning – IRS Issues Temporary Portability Regulations

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[author: Frank C. Chesters]

 

The “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” was enacted December 17, 2010 and is referred to as “TRA 2010.”  This legislation included a significant change to the estate and gift tax applicable exclusion amount by adding the concept of “portability,” which was the subject of an article in the September 2011 edition of “McNees Insights” which is posted at www.mwn.com or by clicking here.

 

The Internal Revenue Service issued temporary regulations effective June 15, 2012 that provide guidance on the estate and gift tax applicable exclusion amount, in general, as well as on the applicable requirements for electing portability of a deceased spousal unused exclusion amount (“DSUE Amount”).  June 15, 2012 was the latest possible date that these temporary regulations could be issued so that they would apply retroactively to estates of decedents who died before they were issued.  Subject to Congress enacting legislation to extend the portability provisions of TRA 2010 beyond December 31, 2012, the legislation is applicable only to decedents who die in calendar years 2011 and 2012.  However, it is recommended that clients assume that the portability provisions will be extended beyond December 31, 2012 and therefore take the necessary steps discussed below to preserve the future use of a deceased spouse’s DSUE Amount.

 

For a decedent who died in calendar year 2011, the filing threshold to be required to file a Federal Estate Tax Return (Form 706) is a gross estate of $5 million.  For decedents who die in calendar year 2012, the amount increased to $5.12 million.  In these cases where a Form 706 is required to be filed, the due date is within nine months of the date of the decedent’s death unless an extension has been granted.  When an executor is not required to file a Form 706, the Internal Revenue Code does not specify a due date for a Form 706 to be filed for the purpose of making the portability election.  The temporary regulations require every estate electing portability of a decedent’s DSUE Amount to file a Form 706 within nine months of the decedent’s date of death, unless an extension of time for filing has been granted.  The portability election only becomes irrevocable, however, on the due date of the Form 706, as extended.  Therefore, before that due date, an electing executor may supersede a previously-filed portability election on a subsequent, timely-filed Form 706.

 

The temporary regulations provide that an appointed executor may file a Form 706 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 may file the Form 706 to elect portability or to opt to have the portability election not apply.  Such a person is referred to as a “non-appointed executor.”  In many cases this will be the decedent’s surviving spouse who is the surviving owner of jointly titled assets as well as the primary beneficiary of nonprobate assets such as life insurance, retirement accounts and annuities.

 

The temporary regulations require that an executor include a computation of the DSUE Amount on the Form 706 to allow portability of that decedent’s DSUE Amount.  A complete and properly-prepared return contains the information required to compute a decedent’s DSUE Amount.  A transitional rule is provided that the IRS will deem the required computation of the decedent’s DSUE Amount to have been made on the Form 706 that is considered complete and properly prepared. The temporary regulations further clarify that, once the IRS revises the prescribed form for the Form 706 expressly to include the computation of the DSUE Amount, executors that previously filed a Form 706 pursuant to the transitional rule will not be required to file a supplemental Form 706 using the revised form.

 

While the temporary regulations provide that executors of estates that are not otherwise required to file a Form 706 do not have to report the value of certain property that qualifies for the marital or charitable deduction, I do not see the benefit of this special rule in most cases.  Since property that qualifies for the marital deduction is entitled to have its cost basis partially adjusted for the purpose of calculating future capital gains and losses, it seems apparent that most, if not all, of the information will be available to prepare a “complete and properly prepared” Form 706.

 

The temporary regulations confirm the IRS’s authority to examine returns of each deceased spouse of the surviving spouse to determine the allowable DSUE Amount even if the period of limitations on assessment has expired for the tax.  Upon examination, the IRS may adjust or eliminate the DSUE Amount reported on a return; however, the IRS may only make an assessment of additional tax with respect to the deceased spouse’s return within the period of limitations.  The ability of the IRS to examine returns of a deceased spouse applies to each transfer by the surviving spouse to which a DSUE Amount is or has been applied.

 

A future article will address additional issues that were addressed by the temporary regulations, including calculating the DSUE Amount available to a surviving spouse who had multiple spouses predecease the surviving spouse and whether the surviving spouse made taxable gifts during his or her lifetime based upon the DSUE Amount in effect when the gifts were made.