Deceased spousal unused exclusion amount, or “DSUEA”
Now, applicable exclusion amount is defined as the basic exclusion, which is the $5 million or the $5,120,000.00, plus the deceased spousal unused exclusion amount, or “DSUEA.” This, in effect, increases the applicable exclusion amount of an electing surviving spouse by any unused exclusion of an electing predeceased spouse. The portability provisions allow the surviving spouse to use the predeceased spouse’s unused exemption regardless of whether or not a bypass trust was established. The way that you determine what the deceased spousal unused exclusion amount is, is you basically compute the gross estate – or rather the taxable estate of the first spouse. Then, subtract out the basic exclusion amount, and the difference is the deceased spousal unused exclusion amount. Now, this amount is limited to the basic exclusion amount of $5 million.
Estate Tax and Spouses
If we assume that the first spouse dies with a taxable estate of $1 million and has no adjusted taxable gifts, then the surviving spouse will die, and if the surviving spouse dies with a taxable estate of $7 million and no adjusted taxable gifts; without portability what will happen is that if the first spouse leaves his or her estate to the survivor, then the survivor’s estate would be an $8 million taxable estate. The estate of the survivor would then owe tax on $3 million, or $8 million minus the $5 million, in 2011. However, under the portability provisions, if the proper elections are made, then the applicable exclusion amount of the surviving spouse will be the basic exclusion of $5 million, plus the predeceased spouse’s unused exclusion, which is $4 million. Well, how did I get that?
Estate Tax Exemption
Well, it’s $5 million minus the first spouse’s $1 million taxable estate, so $4 million. You add that to the basic exclusion amount of the surviving spouse, and you get $9 million. Therefore, there is more than enough applicable exclusion amount to cover the surviving spouse’s $8 million taxable estate. Therefore, there is no estate tax due at either spouse’s death. In effect, what portability does is it allows both spouses to pass a combined amount of $10 million estate and gift tax-free in 2011, or $10,240,000.00 for this year. Note, however, that the DSUEA does not affect the survivor’s filing requirements.
What are the Estate Tax Filing Requirements?
The filing requirements now are redefined to be based upon the basic exclusion amount, not the applicable exclusion amount. So, in my last example, if the decedent had had a gross estate of only say, $6 million, the surviving spouse would still have to file an estate tax return, even though he or she might have enough basic exclusion, plus DSUEA, to offset any tax that would be owed on that surviving spouse’s estate. Okay. One very important drawback on portability is the way the limitations periods work. As you know, with the estate and the gift tax law, there is a three-year period of limitations from the filing of the estate or the gift tax return. What this means is that if the Internal Revenue Service is going to examine that estate or gift tax return, they must do it within three years of time from the time that that return is filed.
Estate Tax Portability
One of the things that the portability legislation does is it opens up the limitations period for the first surviving spouse. The first surviving spouse, when they file their estate tax return in order to make this portability election – and we’ll talk about that in a few minutes – but when they file this estate tax return, the limitations period on that return will remain open until such time as the limitations period on the second spouse passes. So, let’s say, for example, the first spouse dies in 2010. If we assume that Congress continues to extend the portability provisions into future years, and the second spouse does not die until, say, 2020, that statute of limitations period will remain open until three years after the second spouse’s return is filed.
Limitations and DSUEA Amount
I would like to note, however, that that limitations period is only open for purposes of determining the amount of the unused exclusion amount, or the DSUEA amount. Okay. So, the IRS can’t come back 10 years later and assess additional tax. But you will not have any finality on what the DSUEA is until after the limitations period on the second spouse actually passes.
Summary for Estate Tax Portability Changes
Another drawback with respect to the portability provisions is this: in order to elect portability, the executor of the first spouse must file timely a Form 706 for that first spouse. Now, this is true, even though the first spouse might not normally have a filing requirement. Going back to one of my previous examples, if the first spouse’s estate is $1 million, normally there would not be a filing requirement there because the exclusion is $5 million. But if the taxpayer wants to elect portability, they must go ahead and file a Form 706 for that $1 million estate.
Electing Portability Election
If the executor makes that election, then the election is irrevocable. Another thing about portability I want to mention is that portability is only effective for estates of decedents dying after December 31, 2010. That applies to both the first spouse, as well as the second spouse. On this slide, there is a citation to Notice 2011-82, which the IRS issued on October 17, 2011. This notice provides guidance to taxpayers on how to go about electing portability.