The IRS has recently issued guidance on the so-called portability election and the applicable estate and gift tax exclusion amount. As a surviving spouse, this guidance may impact your estate planning opportunities.

In general, the estate tax is imposed on a decedent’s gross estate as increased by the decedents’ taxable lifetime gifts, and reduced by any allowable estate tax deductions, such as the charitable or marital deduction.

In addition, the estate of every decedent is allowed a credit (the “applicable credit amount”) in determining the amount of estate tax due. The applicable credit amount effectively acts to exclude a certain amount of property from the estate tax (the “applicable exclusion amount”). With proper planning a married couple could take advantage of the applicable exclusion amount in each of their respective estates. However, prior to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) it was possible for a married couple to waste the applicable exclusion amount of the first spouse to die. Consequently, the 2010 Tax Relief act introduced the concept of “portability” with respect to the unused portion of the applicable exclusion amount of a predeceased spouse, referred to as the deceased spousal unused exclusion amount (DSUEA).

For estates of decedents dying after 2010, the applicable exclusion amount is equal to the sum of the basic exclusion amount and any available DSUEA, if previously elected. The basic exclusion amount is $5 million, which is adjusted for inflation beginning in 2012. A “portability election” passes along a decedent’s unused estate and gift tax exclusion amount to a surviving spouse.

The IRS guidance discusses the following:

  1. the estate and gift tax applicable exclusion amount, in general;
  1. the requirements for electing portability of any DSUEA to the surviving spouse; and
  1. the applicable rules for the use of the DSUEA by the surviving spouse.

It should be noted that as is the case for other changes made to the estate and gift tax rules by the Economic Growth and Tax Relief Reconciliation Act of 2001, and the 2010 Tax Relief Act, the concept of “portability” of a deceased spouse’s unused exclusion amount will end for the estates of decedents dying after December 31, 2012, unless Congress acts to extend this provision.

Regardless, the estate tax return on which the portability election is made must be filed within the time prescribed by law. In that way, the surviving spouse can take advantage of the DSUEA, should the portability provision be extended.

The IRS guidance explains the requirements for what is considered to be a “complete and properly-prepared return.” If the return is being filed only for the purpose of electing portability, the executor does not have to report the value of certain property qualifying for the marital or charitable deduction. The total value of the gross estate must be estimated based on a determination made with good faith and due diligence regarding the value of all assets includable in the gross estate.

If the executor does not wish to make the portability election, regulations require the executor to make an affirmative statement on the estate tax return indicating this to be the case. When no return is required to be filed for the decedent’s estate, not filing a timely filed return will be considered to be an affirmative statement of the decision not to make a portability election. With certain limited exceptions, only the executor of the estate is allowed to file the estate tax return and make the portability election.

IRS guidance also clarifies the computation of the DSUEA in certain circumstances and addresses the use of the DSUEA by the surviving spouse, including:

  1. the date the DSUEA may be taken into account by the surviving spouse;
  2. the last deceased spouse limitation on the DSUEA available to a surviving spouse; and
  3. the DSUEA available in the case of multiple spouses and previously applied DSUEA.

The portability election should be reviewed as part of your overall estate planning. We are available to discuss all of your options.

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