Need To Know About Estate Tax Portability? We Can Help

Last week, the IRS announced its final rules on the estate tax portability of the deceased spousal unused exclusion (DSUE) amount, which clarifies that portability is only granted to executors if the gross value of the estate is below $5.4 million.
Last week the IRS announced its final rules on the estate tax portability of the deceased spousal unused exclusion (DSUE) amount, which clarifies that portability is only granted to executors if the gross value of the estate is below $5.4 million.

Portability rules

The new IRS rules specify that the surviving spouse can elect portability to use the DSUE amount for their own life and death, according to Reuters. However, these requirements state that the use of the DSUE amount is only granted to the surviving spouse if the estate of the descendants died between January 1, 2011 and June 12, 2015. Therefore, the extension time is only accessible for individuals leaving up to $5.4 million, after which executors are subject to a federal estate tax levy. According to Ashlea Ebeling of Forbes, it is vital to understand how portability works.

"Portability was ushered in effective Jan. 1, 2011 when the estate tax exclusion amount—the amount an individual can leave at death without facing a federal estate tax levy—was bumped up to $5 million, or otherwise, indexed for inflation," Ebeling noted. "In 2015, for example, an individual can leave $5.43 million estate tax-free at death. With portability, a surviving spouse can carry over any unused portion of the deceased's exclusion—the deceased spousal unused exclusion or DSUE amount."

If the value is below this threshold, descendants are not required to file an estate tax return. However, in the event of exceeding the DSUE amount, the IRS only allows executors to elect portability if federal estate tax returns are "completely and properly prepared."

The implications of the new regulations

One of the disadvantages of the final ruling is that if the asset values in the estate were to increase substantially, thereby causing the gross value of the estate to increase past the threshold, that individual is subject to estate taxes and loses portability access. However, spousal and executor designation is another issue, because even if the surviving spouse is not the executor but has a vested interest in the estate, they cannot elect portability. In turn, this exposes the estate to further taxation after the surviving spouse dies. Eileen Sherr, Senior Technical Manager for the American Institute of CPAs, noted that the surviving spouse is still exposed to the complex process of applying for an extension.

"Now we're back to the same situation before the relief," Sherr opined. "A lot of people just don't realize they need to do it."

The IRS also placed limits on the availability of DSUE amounts for non-citizens, stating that surviving spouses do not have access to the estate account unless they become a citizen after the death of the deceased or are explicitly allowed to in a treaty obligation. Furthermore, the final rules prohibit estate tax havens for descendants, with the exception of certain qualified domestic trusts. What this means for taxpayers is that the DSUE amount must be recalculated because of the tax benefits of qualified domestic trusts. These designations are significant because they prohibit surviving spouses and executors from maintaining their rights to the value of the estate while potentially increasing their estate tax burden.

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James F. McDonough, Jr. concentrates on wealth preservation and estate planning for high net worth individuals, closely held business matters and ownership succession, estate administration and income tax planning. He worked for three years for the public accounting firm, then known as Touche Ross, where he obtained his license as a Certified Public Accountant in 1983. In 1984, he was employed as a tax attorney by Union Camp Corporation where he engaged in planning for corporate income deferred compensation, qualified plan and tax-free exchanges. In 1986, Mr. McDonough was employed as Tax Manager for Monroe Systems For Business, Inc. Thereafter, he was employed as a tax attorney for five years where he engaged in corporate and estate tax planning and estate administration and litigation. For more information, please visit James McDonough's full biography at Scarinci Hollenbeck

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