The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“TRUIRJCA”) allowed portability of the applicable exclusion amount ($5,120,000 in 2012) between spouses. The portability sunsets at the end of the 2012, so currently it only applies to decedents dying in 2011 and 2012. The IRS recently issued Regulations to provide guidance. The following are highlights of the Regulations:

  1. Definition of Applicable Exclusion Amount – The applicable exclusion amount is now defined to equal the sum of the basic exclusion amount and the deceased spouse unused exclusion (“DSUE”).
  2. Definition of DSUE – The DSUE is defined as the lesser of (A) the basic exclusion amount of the deceased spouse or (B) the decedent’s applicable exclusion amount, less the amount with respect to which the tentative tax is determined on the estate of such deceased spouse. The regulations clarified that an original reference in (B) to the “basic exclusion amount” actually meant to refer to “applicable exclusion amount.”
  3. Electing Portability – The surviving spouse may only use the DSUE if the estate of the deceased spouse elects portability and computes the DSUE. The election is made by timely filing an estate tax return. Until the form is revised, the return will be deemed to include a DSUE computation. To opt out the executor may either make an affirmative statement or not file a return (if not otherwise required to do so).
  4. Extension for Decedent’s Dying in Early 2011 – The IRS granted an extension to file for estates of a decedent dying in the first half of 2011 who were not otherwise obligated to file the return. These estates must file the return within 15 months of death.
  5. Relief for Small Estates – If an estate is not otherwise obligated to file the estate tax return, it does not have to report the value of certain property qualifying for the marital or charitable deduction. It need only report enough information to establish an asset’s eligibility for a deduction. Instead, the 706 Instructions will provide value ranges and the personal representative must select the appropriate range based on a good faith estimate.
  6. Who May Make the Election – Only an executor may make the election. If there is no executor, any person in actual or constructive possession of property may elect portability.
  7. Gifts Which Incurred Tax Excluded for Purposes of Determining DSUE – Any gifts upon which the deceased spouse paid tax are excluded in the DSUE calculation.
  8. Ordering Rule – When a surviving spouse makes a gift, the DSUE of the last deceased spouse will be considered to apply before the surviving spouse’s own basic exclusion amount.
  9. Statute of Limitations – The IRS may examine an old estate tax return at any time for purposes of calculating the DSUE.