A simple oversight could cost your clients as much as $1.75 million in estate tax exposure. If your client dies in 2011 or 2012 and their estate doesn’t take affirmative action to elect the applicable exclusion portability on an estate tax return, their beneficiaries could permanently lose the benefit of the Deceased Spousal Unused Exclusion Amount, which was enacted as part of the two-year estate tax makeover in the Tax Relief Act of 2010.
The Deceased Spousal (or alternatively “Spouse” or “Spouse’s”) Unused Exclusion Amount (DSUEA) is a big deal because it allows married couples to fully utilize both spouses’ exclusion amounts without having to resort to an A-B trust arrangement—which can have an adverse effect on beneficiaries’ basis in assets they receive from the B trust after the second spouse’s death.
Now, if the first-spouse-to-die’s (“first spouse”) estate does not fully utilize that spouse’s exclusion amount, the second-spouse-to-die’s (“second spouse”) estate can add the first spouse’s unused exclusion amount to the second-spouse’s exclusion amount, increasing the amount of property that can pass to the beneficiaries’ estate tax-free upon the second spouse’s death.
The effect of the DSUEA is to allow the second spouse to shield up to $10 million from estate tax without the use of a credit shelter trust.
As great as the DSUEA is for your high-net-worth clients, it is anew concept, and the IRS is only now getting around to issuing guidance on how the DSUEA works. Two of the big unanswered questions are as follows:
- Does the DSUEA need to be elected by the estate of the first spouse? Or does the DSUEA automatically extend the first spouse’s unused exclusion amount to the second spouse?
- Can the first spouse’s estate elect against the DSUEA? And if so, what is the procedure to elect against the DSUEA?
Electing the DSUEA
Estate tax returns for estates that will be affected by the new estate tax were due as early as October 3 of this year, so the IRS’s guidance is going to be too late for some estates. The portability provisions of the Tax Relief Act are available to estates of decedents dying after Dec. 31, 2010 and before Jan. 1, 2013.
The essence of the IRS’ guidance on portability is that portability must be elected. If one of your clients dies after Dec. 31, 2010 leaving a surviving spouse behind, the deceased spouse’s estate must make a timely portability election. If they don’t make the election, the second spouse’s estate could, depending on the circumstances, face an additional tax bill of $1,750,000!
Estate tax returns generally are due nine months after the decedent’s death, but estates have the option of paying the estimated correct amount of estate tax due and requesting a six-month extension prior to the return’s due date.