Late on Friday, June 12 the IRS released the Final Portability Regulations. These Regulations replace the Temporary and Proposed Regulations that were released in 2012. The Regulations have an effective date of June 12 and implement important changes made by Congress in December 2010.
When Congress amended the tax laws in 2010, it allowed that part of a decedent’s unused estate tax exclusion or DSUE amount ($5.43 million for individuals who die in 2015) to pass to a surviving spouse to use to shelter the survivor’s large lifetime gifts and transfers at death. Allowing the surviving spouse to have the benefit of the DSUE amount is commonly referred to as “portability.”
While the Final Regulations largely adopt the Temporary and Proposed Regulations, we have highlighted below several possible calls to action that could affect you or your family.
- The Final Regulations serve as an important reminder that married couples with estates worth less than $10 million who have not updated their estate plans since 2010 need to have their plans reviewed. In many cases, couples can simplify their planning, simplify the affairs of a surviving spouse and create income tax benefits for surviving descendants after the death of the surviving spouse.
- The Final Regulations declined to give the surviving spouse a right to make the portability election if the spouse is not the executor of the estate. In addition, a surviving spouse was not given a right to participate in any audit of the estate of the first spouse to die and the determination of the DSUE amount. Especially for couples in second marriages or contemplating one, the Final Regulations reinforce the need for careful selection of fiduciaries and the importance of provisions in Wills and Trusts that clearly instruct survivors who can make the portability election or who can require that the election be made.
- The Service also declined to use the Final Regulations as an opportunity to address important lingering questions related to Revenue Procedure 2001-38 on the portability election. (This Revenue Procedure originally was issued to provide taxpayers a helpful means to disregard marital deductions for QTIP trusts when not necessary to reduce the estate tax to zero. Concern has existed whether this Revenue Procedure precludes these QTIP elections for the purpose of triggering portability of the unused exclusion amount. Unfortunately, the Service declined to issue relevant guidance.) Instead it stated "The Treasury Department and the IRS intend to provide guidance, by publication in the Internal Revenue Bulletin, to clarify whether a QTIP election made under section 2056(b)(7) may be disregarded and treated as null and void when an executor has elected portability of the DSUE amount under section 2010(c)(5)(A)." Pending release of guidance, clients who rely on QTIP trusts as a centerpiece of their estate planning should consult with their estate planning attorney about whether changes are warranted; and the alternatives.
- The Final Regulations also reinforce the importance of consulting with estate planning counsel following the death of a spouse to determine whether an estate tax return is required or appropriate. Separate IRS Regulations under Section 9100 of the Internal Revenue Code enable estates to request permission to file estate tax returns after the due date. In the Final Portability Regulations, the Service clarified that Section 9100 relief will be available only when the gross estate is below the filing threshold amount (gross estate of $5.43 million). Even for estates below the filing threshold, obtaining permission under Section 9100 to file late estate tax returns for portability purposes is not automatic and adds expense. As a result, where portability of the DSUE amount is, or might be, important in the future upon the death of the surviving spouse, the best course of action may be to file an estate tax return upon the death of the first spouse to die, even when the estate is less than the amount for which a return is otherwise unnecessary.
If you have any questions regarding the Final Regulations or any other estate planning issue, please contact Mark Harder, 616.396.3225, or any member of our Trusts & Estates Practice Group.
