Portability allows the first spouse to die to leave his or her unused estate tax exclusion amount to the surviving spouse. The unused estate tax exclusion is technically called the “Deceased Spousal Unused Exclusion Amount” (“DSUE”). Portability was part of the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 and portability became effective for married persons dying on or after January 1, 2011. Portability was made permanent by the American Taxpayer Relief Act of 2012 (“TRA 2012”).
The 2015 Gift and Estate Tax Exclusion amount is $5.43 million. This number is adjusted annually by inflation. The first spouse to die may leave his or her assets to the surviving spouse and the surviving spouse inherits assets from a deceased spouse estate tax free. The DSUE amount of $5.43 should be elected and transferred to the surviving spouse to create $10.86 million dollar estate and gift tax exclusion amount for the surviving spouse.
In order for the surviving spouse to be able to use the DSUE amount, the Executor of the deceased spouse’s estate must file a properly prepared 706, United States Estate (and Generation-SkippingTransfer) Tax Return. Part 6 of the 706 addresses the DSUE amount. The preparation of the 706 may not be needed for any other reason except to make the election to preserve the DSUE amount for the surviving spouse. The 706 must be filed within 9 months of the death of the deceased spouse. There is a 6 month automatic extension if the application for extension is filed within the first 9 months from the date of death.
The last deceased spouse rule provides that a surviving spouse’s applicable exclusion amount includes the DSUE amount inherited from the surviving spouse’s last deceased spouse. A special rule in the portability regulations for calculating the applicable exclusion amount provides that any DSUE inherited from a prior deceased spouse can be preserved, even if an individual remarries and survives a second spouse, if the remarried spouse makes taxable gifts that use up the DSUE amount inherited from the first deceased spouse before he or she survives a second spouse.
If the surviving spouse of the first marriage who inherited a DSUE amount dies before the new spouse of the second marriage, then the surviving spouse of the first marriage who remarries may not be able to use the DSUE amount inherited. This is because the inherited DSUE amount is equal to the lesser of (1) the basic exclusion amount or (2) the applicable exclusion amount of the individual’s last deceased spouse, reduced by the sum of the last deceased spouse’s taxable estate and adjusted taxable gifts.
The TRA 2012 increased the Generation-Skipping Transfer (GST) tax exemption to the same amount of the gift and estate tax exclusion and is indexed for inflation. However, portability does not apply to the GST tax or to the GST exemption amount. Thus, if the first deceased spouse does not utilize his or her GST exemption amount, it will be lost.
Portability of the DSUE amount from the deceased spouse to the surviving spouse should be considered during the estate planning process while both spouses are living. Many items need to be considered during the planning process, including the assets of the married couple, potential inheritance, ages of the clients, type of assets owned by the clients, growth and appreciation of the assets, income tax liability, step up in basis of assets, asset protection, settlor’s intent, second marriages, children of first marriage and GST exemption utilization.
Trustees, Personal Representatives of Estates and advisors now need to add to their checklist the requirement of having a discussion and an evaluation on whether a 706 should be filed on the death of the first spouse in order to preserve the DSUE amount for the surviving spouse.