Temporary Regulations for Portability


On December 17, 2010, Congress enacted The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Act").  The Act amended the Internal Revenue Code ("Code") to allow portability of the applicable exclusion amount between spouses.

Specifically, the Code now defines the applicable exclusion amount as the sum of the basic exclusion amount and, in the case of a surviving spouse, the deceased spouse’s unused exclusion (DSUE) amount.   This means, in general, that a surviving spouse can use his or her own exclusion amount (currently $5,000,000) and the unused exclusion amount of his or her deceased spouse, possibly another $5,000,000.

The Code provides for special rules relating to the portability of a DSUE amount that must be met to allow a surviving spouse to take into account a DSUE amount of a deceased spouse. In particular, the executor of the estate of the deceased spouse must file an estate tax return, compute the DSUE amount on such return, elect portability of the DSUE amount on such return, and ensure that such return is filed within the time prescribed by law (including extensions) for filing such return.

On October 17, 2011, the Department of the Treasury ("Treasury") and the IRS issued Notice 2011-82 (2011-42 IRB 516) which alerted taxpayers to the requirements for the estate of a deceased spouse to elect portability of a DSUE amount.  Notice 2011-82 announced that the estate of a deceased spouse will be deemed to elect portability of the DSUE amount by timely filing a complete and properly prepared estate tax return, and that such return will be deemed to include a computation of the DSUE amount until such time as the IRS revises the estate tax return to expressly contain the DSUE amount computation. Notice 2011-82 also provides guidance to the estates of deceased spouses who choose not to make the portability election.

On March 3, 2012, Treasury and the IRS issued Notice 2012-21(2012-10 IRB 450). This notice granted to qualifying estates a six-month extension of time for filing an estate tax return to elect portability of an unused exclusion amount provided that the qualifying estate filed Form 4768, “Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes,” within 15 months of the decedent’s death.

A qualifying estate is the estate of a person who died, survived by a spouse, during the first half of calendar year 2011, and whose gross estate had a fair market value that did not exceed $5 million. With the extension granted by this notice, the estate tax return must be filed within 15 months of the decedent's death.

The temporary regulations require an executor electing portability to make that election on a timely-filed estate tax return. Generally, estate tax returns are due within nine months following the decedent’s death. When an executor is not required to file an estate tax return (due to the relatively small size of the estate), the Code does not specify a due date for a return filed for the purpose of making the portability election.

The temporary regulations require every estate electing portability of a decedent’s DSUE amount to file an estate tax return within nine months of the decedent’s date of death, unless an extension of time for filing has been granted.

If the executor of the estate of a decedent with a surviving spouse does not wish to make the portability election, the temporary regulations require the executor to make an affirmative statement on the estate tax return signifying the decision to have the portability election not apply.

If no estate tax return is required for that decedent’s estate, not filing a timely return will be considered to be an affirmative statement signifying the decision not to make a portability election.

The temporary regulations require that an executor include a computation of the DSUE amount on the estate tax return of the decedent to allow portability of that decedent’s DSUE amount.

A “complete and properly-prepared return” contains the information required to compute a decedent’s DSUE amount. Accordingly, in a transitional rule consistent with Notice 2011-82, the temporary regulations provide that the IRS will deem the required computation of the decedent’s DSUE amount to have been made on an estate tax return that is considered complete and properly prepared. The temporary regulations further clarify that, once the IRS revises the prescribed form for the estate tax return expressly to include the computation of the DSUE amount, executors that previously filed an estate tax return pursuant to the transitional rule will not be required to file a supplemental estate tax return using the revised form.

The temporary regulations also provide that amounts on which gift taxes were paid by a decedent are excluded from adjusted taxable gifts for the purpose of computing that decedent’s DSUE amount.

The temporary regulations are lengthy and complex. Executors will need to become familiar with the details of making the portability election and computing the portability amount. Fortunately, the temporary regulations provide several examples that should provide guidance.