As I have mentioned in a previous blog the concept of portability enables a surviving spouse to take advantage of his or her deceased spouse’s unused exemption (“DSUE”) amount. For example, if Sue dies and only uses 2 million of her 5.430 million exemption amount, Harry, the surviving spouse can “port” over Sue’s unused DSUE of 3.430 million for either gifting or estate tax purposes. Not only can he use her DSUE, but he would also have his own 5.430 million exemption (or whatever exemption is applicable in the year of his death). The Internal Revenue Service (“IRS”) has issued regulations regarding portability. Temporary regulations were issued on June 28, 2012. Since that time practitioners issued comments and suggestions. The new final regulations were issued on June 16, 2015 and are effective June 12, 2015.
As the regulations and comments are 53 pages I want to just point out a few key items:
1. Many practitioners were worried because, if an estate tax return electing portability and the DSUE amount was not filed in a timely manner, then portability could be lost. Many practitioners and their clients have missed the deadlines for filing. There are several regulations that permit late filings under the proper circumstances and it was unclear if these regulations would apply to late portability elections. These final regulations provide that an extension of time will NOT be granted if the estate is otherwise required to file an estate tax return (i.e. the estate is over the 5.430 million this year) BUT if the gross estate is BELOW the threshold amount, is not otherwise required to file a return and the only reason for filing the return is to elect portability, relief may be granted.
2. One commentator suggested having a “protective” election if the DSUE amount was incorrectly calculated. The IRS did not incorporate such an election in the final regulations because a recomputed DSUE will be available to the decedent’s surviving spouse. Thus, if incorrectly calculated because of adjustments, the DSUE amount will be allowed.
3. Commentators have suggested a “short form” estate tax return when the only reason for filing an estate tax return is to elect the DSUE amount. For example, if an estate is well under 5.430 million an estate tax return is not otherwise required. If an estate is only $400,000 and the surviving spouse wants to use the DSUE amount, an estate tax return MUST be filed. Many practitioners and clients want a “short form” to save time and expense. Unfortunately, the IRS has concluded that “a timely filed, complete and properly prepared estate tax return affords the most efficient and administrable [sic] method of obtaining the information necessary to compute and verify the DSUE amount, and the alleged benefits to taxpayers from an abbreviated form is far outweighed by the anticipated administrative difficulties in administering the estate tax.”
4. The final regulations address qualified domestic trusts, examinations of tax returns for the DSUE amount calculation after the estate tax return statute of limitations has expired, availability of the election after a non-spouse citizen becomes a citizen of the United States. applicability of the election and Revenue Procedure 2001-38 (which they merely state that they are intending to provide guidance in an Internal Revenue Bulletin) and other items.
ADVICE: This is a very complicated area of the law better left to experienced estate tax practitioners. I have highlighted these regulations for my clients and others to merely advise them of the new regulations and the need to discuss their applicability to their situation. This blog is by no means a comprehensive outline of the final regulations. Just be sure that you discuss this with your adviser especially if you have recently lost your spouse and have the ability to use your predeceased spouse’s DSUE.
New Word of the Week: Laches- In litigation the person asserting laches is stating that the opposing party has “slept on its rights,” and that, as a result of this delay, witnesses and/or evidence may have been lost or no longer available, and circumstances have changed such that it is no longer proper to grant the original claim. Thus, failure to assert one’s rights in a timely manner can result in a claim being barred by laches.
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