Clients who anticipate leaving relatively modest estates should pay close attention to the recently released IRS final regulations governing the deceased spousal unused exclusion amount (DSUE, also known as portability).  While the portability rules are typically most helpful in the context of large estates that will exceed the estate tax exemption amount (currently $5.43 million per spouse), it is the on-the-fence, midsize estates that could be most impacted by the new regulations.  The regulations contain special rules that provide leniency for smaller estates that, but for portability, might not be required to file an estate tax return — and also provide relief in situations where the final value of the estate may be uncertain, making these rules particularly valuable to a group of clients that might be overlooking the portability strategy entirely. 

A Primer on Portability

Portability is essentially the right of a surviving spouse to use any of a deceased spouse’s unused transfer tax exemption amount — thereby increasing his or her own estate and gift tax exemption amount in order to exclude more of his or her assets from transfer tax liability.

Generally, a surviving spouse may apply the deceased spouse’s unused estate tax exclusion amount to the surviving spouse’s own transfers if portability is elected by filing a timely estate tax return (typically, within nine months of the date of death, with an automatic extension of six months).  

While an estate that does not exceed the estate tax exemption amount is not generally required to file an estate tax return, a return is required in order to elect portability.

The Final Regulations

The final regulations provide that an extension of time may be available for filing the estate tax return only if the value of the estate otherwise does not exceed the threshold filing levels ($5.43 million per individual in 2015).  In other words, an extension of time may be granted if the taxpayer is only required to file an estate tax return because of a desire to elect portability—a filing that must be made even if the surviving spouse is not certain that his or her eventual estate will exceed the exemption amount. 

Further, an executor will be treated as though portability has been properly elected if the executor completes and files an estate tax return containing a computation of the unused DSUE amount, but it is later found that adjustments are required in order to recalculate the correct amount.  The final regulations clarify that the recomputed DSUE amount will be available to the surviving spouse in such a situation, and the originally filed return will be considered “complete and properly prepared” for purposes of the election. 

The regulations also contain information relating to the treatment of non-citizen spouses. Under these rules, a surviving spouse who was not a U.S. citizen may use the DSUE amount if he or she subsequently becomes a U.S. citizen and the executor of the estate has filed an estate tax return properly making the portability election.  

The regulations rejected suggestions that a short-form estate tax return be adopted for smaller estates that are required to file an estate tax return only to preserve the portability election.

Conclusion

In general, the regulations emphasize the importance of filing an estate tax return to elect portability even in situations where the taxpayer is uncertain as to whether his or her final estate value will exceed the exemption amount.  Relief is now available for situations in which the unused DSUE amount is uncertain, which can prevent a taxpayer from losing a portion of the otherwise available exclusion amount.

For previous coverage of portability in Advisor’s Journal, see http://nationalunderwriteradvancedmarkets.com/articles/default.aspx?filename=fc050113-c.htm&search=portability&type=and

For in-depth analysis of estate tax planning, see Advisor’s Main Library: http://nationalunderwriteradvancedmarkets.com/articles/default.aspx?filename=f114_1_114_1010.htm&search=portability&type=and

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