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New Regs Clarify Rules For Estate Exemption Portability Provision

(posted: October 5th, 2015)

The "portability" provision in the federal estate tax provides greater flexibility in estate tax planning for married couples.

Alert: The IRS has issued new final regulations pertaining to the portability provision. Generally, the new regs follow previous proposed and temporary regulations but with certain modifications. The final regulations are effective as of June 12, 2015 and apply to estates of decedents dying on or after that date.

Under the American Taxpayer Relief Act of 2012 (ATRA), the unified federal estate and gift tax exemption was permanently locked in at $5 million subject to annual inflation indexing, and the estate and gift tax rate was set at a flat 40%. (The estate tax exemption for decedents dying in 2015 is $5.43 million.) ATRA also preserved the portability provision allowing a surviving spouse to take over any unused exemption of the deceased spouse. This amount is called the "deceased spousal unused exemption" (DSUE) amount.

Example: Husband and Wife each own $2 million individually and $3 million jointly with rights of survivorship for a total of $7 million in assets. Under their wills, all assets pass first to the surviving spouse and then to the couple's children.

If Husband dies in 2015, the $2 million in assets he owns individually is covered by the unlimited marital deduction. Therefore, his entire $5.43 million unified federal estate and gift tax exemption is unused. When Wife dies, her estate can use the $5.43 million DSUE amount taken over from Husband's estate, plus her own exemption for the year in which she dies, to shelter her $7 million estate from the federal estate tax, with plenty of room to spare.

Contrast this outcome with the possible results without the portability provision. If Wife were to die later in 2015 with $7 million of assets in her estate, the 40% federal estate tax rate would apply to $1.57 million ($7 million minus $5.43 million) for a whopping federal estate tax bill of $628,000!

Here are some of the key points outlined in the new final regulations:

  • Although DSUE amount is an essential requirement of a complete and properly prepared estate tax return with the portability election, the IRS acknowledges that there are times when subsequent adjustments to the return might modify the amount of the unused exclusion of that decedent (e.g., there are pending claims against the estate). The final regs clarify this is an allowable exception to the "completion" rule.
  • The temporary regs generally prohibited a noncitizen, nonresident surviving spouse or the estate of a surviving spouse from taking into account the DSUE amount of any deceased spouse except to the extent allowed under a U.S. treaty obligation. However, the final regs include a rule allowing a surviving spouse who becomes a U.S. citizen after the death of the deceased spouse to take into account the DSUE amount.
  • The proposed regs didn't address rules on the impact of the credits (e.g., for gift tax or foreign death taxes) on computing the DSUE amount. Under the final regs, eligibility for credits against estate tax doesn't factor into the computation of the DSUE amount.

For more information, please Contact Us.

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