Recent developments in estate planning.

AuthorRansome, Justin
PositionPart 2

PREVIEW

* Learn about the final rules on portability of estate tax exemptions.

* Find out how the IRS treats income in respect of a decedent from an IRA.

* Get the details about the Obama administration's proposals to amend gift, trust, estate, and generation skipping transfer tax laws.

This is the second of a two-part article examining developments in estate, gift, trust, and generation-skipping transfer taxes between June 2014 and May 2015. Part 1, which was published in September, discussed gift and estate tax developments. Part 2 covers the final regulations on the portability of a deceased spouse's unused estate tax exemption; trust taxation; President Barack Obamas estate, gift, and generation-skipping transfer (GST) tax proposals; and the inflation adjustments for 2015.

Portability of a Deceased Spouse's Unused Exclusion Amount

One of the provisions in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, (1) enacted on Dec. 17, 2010, amended Sec. 2010 to allow for portability of the estate tax exemption between spouses. Sec. 2010(c) generally allows the surviving spouse of a decedent dying after Dec. 31, 2010, to use the decedent's unused estate tax exemption in addition to the surviving spouse's own estate tax exemption. For example, if a decedent dies during 2015 (when the estate tax exclusion amount is $5.43 million) having used $3 million of the decedent's own exclusion amount, the decedent's estate could make the portability election so that the decedent's surviving spouse would have an exclusion amount of $2.43 million from the decedent in addition to his or her own exemption amount. Thus, portability eliminates for many spouses the need to retitle property and create trusts solely to take full advantage of each spouse's estate tax exemption.

On June 16, 2015, the IRS released final regulations (T.D. 9725) on the estate and gift tax applicable exemption amount, as well as the requirements for electing portability of a deceased spouse's unused exemption (DSUE) amount. T.D. 9725 is effective June 12, 2015, and adopts, with some modifications, the proposed regulations. (2) T.D. 9725 also withdraws the temporary regulations. (3) Note that the temporary regulations still apply to estates of decedents dying on or after Jan. 1, 2011, and before June 12, 2015.

The portability election must be made by timely filing an estate tax return, which is due nine months after the date of the decedent's death unless an extension of time to file the return is obtained. The final regulations clarify that, to make the portability election, the estate tax return must be filed within this time period even if the estate would not otherwise be required to file a return because the decedent's gross estate was less than the basic exemption amount under Sec. 2010(c) ($5.43 million in 2015). For estates with a gross estate value below the Sec. 6018 filing threshold amount, the final regulations state that the IRS may grant an extension of time to file under Regs. Sec. 301.9100-3. However, the IRS may not grant an extension of time to elect portability under Regs. Sec. 301.9100-3 to any estate required to file an estate tax return under Sec. 6018, because the due date for the return is governed by statute.

The executor can choose not to elect portability by either making an affirmative statement to that effect on the estate tax return or by not filing a timely return. Once made, the election is irrevocable. The executor is the one who either makes or does not make the election. If there is no appointed executor, any person in actual or constructive possession of any property of the decedent (a "nonappointed executor") may file the estate tax return and choose whether to make the election. A portability election made by a nonappointed executor cannot be superseded by a contrary election made by another nonappointed executor.

To make a valid portability election, the estate tax return must be complete and properly prepared. A special rule applicable to estates that are not required to file an estate tax return, but want to make a portability election, excuses the executor from reporting the values of certain property that qualifies for the marital or charitable deduction. This special rule, set forth in Regs. Sec. 20.2010- 2(a)(7)(ii)(A), is not available if the value of property is needed to determine the estate's eligibility for another estate or GST tax provision for which the value of the property must be known. The final regulations clarify that determining basis under Sec. 1014 is not "another provision" for which the value of property must be reported on an estate tax return.

If an executor chooses to apply the rule set forth in Regs. Sec. 20.2010-2(a) (7)(ii)(A), the executor will be required to report only the description, ownership, and/or beneficiary of the property along with the information necessary to establish the right of the estate to the marital or charitable deduction for this property. If the executor chooses this option, he or she must estimate the total value of the gross estate, based on a determination made in good faith and with due diligence regarding the value of all the assets includible in the gross estate. The executor must identify the particular range applicable to the gross estate from the ranges of dollar values provided in the instructions to the estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return).

The final regulations require the executor to compute the DSUE amount on the estate tax return, which is done on Part 6 of Form 706. When the DSUE amount is uncertain (e.g., because the estate requested a refund), the executor satisfies the Sec. 2010(c)(5)(A) computation requirement if the estate tax return is prepared in accordance with the requirements of Regs. Sec. 20.2010-2(a)(7).Thus, there is no need to make a protective election if a DSUE amount is not reflected on an otherwise complete and properly prepared estate tax return.

The computation of the DSUE amount is based on the basic exemption amount in effect in the year of the death of the decedent whose DSUE amount is being computed. If the decedent paid gift tax on taxable gifts because the taxable gifts exceeded the applicable exemption amount at the time of the gift, these gifts are exempted from adjusted taxable gifts for purposes of computing the decedent's DSUE amount. This adjustment is necessary so that the decedent's exemption amount is not used for amounts on which gift tax was paid. The final regulations state that the eligibility for other estate tax credits (e.g., the credits contained in Secs. 2012 through 2015) does not factor into the calculation of the DSUE amount. Estate tax liability is calculated by first subtracting the applicable credit amount under Sec. 2010 and then applying the credits under Secs. 2012 through 2015. Any unused credit derived under Secs. 2012 through 2015 is lost.

If the portability election is made, the DSUE amount of the last deceased spouse is available for use by the surviving spouse for transfers occurring after the decedent's date of death. The last deceased spouse is the most recently deceased individual who was married to the surviving spouse at that individual's death, provided the individual died after Dec. 31, 2010. Remarriage by the surviving spouse does not affect who will be considered the last deceased spouse and does not prevent the surviving spouse from including in the surviving spouse's applicable exclusion amount the DSUE amount of the deceased spouse who most recently preceded the surviving spouse in death. The identity of the last deceased spouse is not affected by whether the estate of the last deceased spouse makes the portability election or has any DSUE amount available.

When a surviving spouse has more than one deceased spouse, the final regulations apply an ordering rule. Any gifts made by a surviving spouse use up the DSUE amount of the last deceased spouse (identified as of the date of the gift) before using up any of the surviving spouse's own basic exemption amount. The surviving spouse's DSUE amount then becomes the DSUE amount of the last deceased spouse (identified as of the date of a subsequent gift or the death of the surviving spouse) plus any DSUE amount actually applied to the surviving spouse's taxable gifts to the extent it was from a decedent who is no longer the last deceased spouse. Examples in the final regulations illustrate the operation of these provisions.

The final regulations confirm that the IRS may examine the returns of each deceased spouse of the surviving spouse in order to adjust or eliminate the DSUE amount, regardless of whether the period of limitation for assessment has expired. The IRS may assess additional estate tax on those prior returns only if the period of limitation on assessments is still open.

Observation: The final regulations resolve multiple questions practitioners raised in comments, but they also leave open some issues the IRS plans to resolve in the future. The IRS did not take the opportunity to make permanent the automatic extension of time to elect portability as set forth in Rev. Proc. 2014-18, for estates with no estate tax return filing requirement under Sec. 6018. The Treasury Department indicated that it will continue to consider requests for permanent extensions of this type of relief for estates of decedents who died on or after Jan. 1, 2014, that did not make portability elections because they were not required to file an estate tax return. Until further guidance is issued, however, relief to make a late election must be obtained through a private letter ruling.

The IRS did not provide any guidance, but plans to do so in the future, regarding whether a qualified terminable interest property (QTIP) election made under Sec. 2056(b)(7) maybe disregarded and treated as null and void (under Rev. Proc. 2001-38) when an...

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