July 10, 2015
Authored by: Andrew Bleyer and Doug Stanley
The IRS issued final regulations for electing portability and use of a deceased spousal unused exclusion amount (DSUE) on June 12, 2015. Though the final regulations are fairly technical, they are worth understanding as applying them correctly can mean a $5,430,000 difference in the amount that passes through an estate tax free. The final regulations adopt the temporary regulations that were issued in 2012, with several changes and clarifications:
1. Upon request, the proposed regulations allowed for an extension of time to elect portability for those estates that did not meet the requirements for an automatic extension. It was unclear whether estates that exceed the basic exclusion amount (currently $5,430,000 indexed for inflation) could request such an extension because the filing deadline for such estates is prescribed by statute and thus cannot be modified by regulation. The final regulations clarify that
because such extension is a creature of the regulations, it is available only to those estates for which the filing deadline is prescribed by regulation, not by statute. Thus, the extension of time to elect portability upon request is available only to those estates that do not exceed the basic exclusion amount. See § 20.2010-2(a)(1).
2. Under the proposed regulations, it was clear that when an estate filed a return electing portability but a protective claim later resulted in more DSUE becoming available, the additional DSUE would be available to the surviving spouse. But what about a situation where the deceased spouse had zero DSUE at the time of death? What happens if a protective claim later results in DSUE becoming available? In such a situation, the finalized regulations clarify that, so long as the executor timely filed a properly prepared estate tax return showing a DSUE amount of zero and did not opt out of portability, the IRS considers portability elected for the DSUE resulting from the protective claim and the recomputed DSUE amount will be available to the surviving spouse. Thus, it is important to elect portability even when the estate has no DSUE available at the time the return is filed. See § 20.2010-2(b).
3. In addition, the final regulations clarify certain situations where the value of an asset need not be reported on a return filed for an estate that does not exceed the basic exclusion amount. In general, on a return filed for an estate that does not exceed the basic exclusion amount, the executor is not required to report the exact value of property which is subject to a marital or charitable deduction. The proposed regulations prescribed an exception to this rule in cases where the value of such property was needed to determine the estate’s eligibility for a provision of the Code for which the value of the property, the gross estate, or the adjusted gross estate must be known (e.g. §§ 2032, 2032A). Because the value of estate property is always needed to determine its basis pursuant to section 1014, the IRS was concerned that this exception would apply to all estate assets. Accordingly, the final regulations clarify that the exception does not include section 1014. See § 20.2010-2(a)(7)(ii)(A)(2).
4. Finally, the final regulations clarify the impact of a surviving spouse becoming a citizen of the United States. The proposed regulations provided that the DSUE amount for an estate claiming a marital deduction for property passing to a qualified domestic trust (QDOT) should be calculated the same way as DSUE is calculated for any other decedent. However, a decedent’s DSUE amount is not available to the surviving spouse until the date that triggers the decedent’s final estate tax liability under 2056A. Because the estate tax payments made from a QDOT are part of a decedent’s tax liability, the decedent’s DSUE would not likely be available to the surviving spouse until the termination of all QDOTs created or funded by the decedent. The final regulations clarify that if the surviving spouse becomes a citizen of the United States, so long as the requirements of section 2056A are met, this delay is not applicable. Further, after the surviving spouse becomes a citizen of the United States, he or she may take into account the decedent’s DSUE amount. See §§ 20.2010-2(c)(4), 20.2010-3 and 25.2505-2.