How many times has the executor of an estate say upon the death of a parent that an estate tax return was not required to be filed for the deceased parent because the value of the estate was less than the estate tax credit? Would the same conclusion had been reached if the executor had consulted with a tax professional regarding the estate tax preparation or tax planning services?
The estate of every decedent is allowed a credit (the “applicable credit amount”) in determining the amount of estate tax due. The applicable credit amount effectively acts to exclude a certain amount of property from the estate tax (the “applicable exclusion amount”). With proper planning, a married couple could take advantage of the applicable exclusion amount in each of their respective estates.
The 2010 Tax Relief Act introduced the concept of “portability” with respect to the unused portion of the applicable exclusion amount of a predeceased spouse, referred to as the deceased spousal unused exclusion (DSUE) amount. A “portability election” passes along a decedent’s unused estate and gift tax exclusion amount to a surviving spouse. The American Taxpayer Relief Act of 2012 then made portability permanent. How does the DSUE work?
Let’s assume that when the first spouse died in 2013 his one-half share of the $8 million estate was worth $4 million. Since his estate was less than the applicable credit amount of $5 million (increased by inflation to $5.25 million in 2013), there was no estate tax due. If no estate tax return had been filed or if the attorney filing the estate tax return had not made an election to claim the DSUE, when the surviving spouse passed away a couple of years later when the estate was worth $10 million, her estate would have only been entitled to the $5.25 million estate tax credit. Had the portability election been made, the surviving spouse’s entire $10 million estate would have escaped taxation because the applicable exclusion amount is equal to the sum of the basic exclusion amount and any available DSUE amount ($5.25 million from the first to die and her $5.25 million exclusion), which in this case, would have been $10.5 million. Naturally as a surviving spouse, this portability election may significantly impact estate planning opportunities.
Executors of certain estates that failed to file Form 706 to elect portability of a deceased spouse’s estate tax exclusion need to consult with a tax professional. Relief guidance issued by the Internal Revenue Service applies to estates of decedents who died in 2011, 2012 or 2013, and, the IRS notes, may apply to estates of decedents who were in same-sex marriages that were not recognized for federal purposes at the time the decedent died.
The estate tax return on which the portability election is made must be filed within the time prescribed by law. In that way, the surviving spouse can take advantage of the DSUE amount.
The IRS guidance explains the requirements for what is considered to be a “complete and properly-prepared return.” If the return is being filed only for the purpose of electing portability, the executor does not have to report the value of certain property qualifying for the marital or charitable deduction. The total value of the gross estate must be estimated based on a determination made with good faith and due diligence regarding the value of all assets includible in the gross estate.
If the executor does not wish to make the portability election, regulations require the executor to make an affirmative statement on the estate tax return indicating this to be the case. When no return is required to be filed for the decedent’s estate, not filing a timely filed return will be considered to be an affirmative statement of the decision not to make a portability election. With certain limited exceptions, only the executor of the estate is allowed to file the estate tax return and make the portability election.
The portability election is effective as of the deceased spouse’s date of death. As a result, the surviving spouse may take into account the DSUE amount in determining his or her applicable exclusion amount and applied against gifts made after the date of death of the deceased spouse. The DSUE amount, however, is applied first before the surviving spouse’s own exclusion amount.
The portability election should be reviewed as part of your overall estate planning. If you want to learn more about the proper classification of your workers, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation.
You can also schedule a consultation at Click Here. To learn more about various tax and business services, visit Tax Preparation Services and Small Business Accounting Services
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