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Monday, November 2, 2015

Portability of the Unused Exclusion Amount of a Deceased Spouse

Portability means that a surviving spouse’s applicable exclusion amount (also known as the surviving spouse’s credit shelter)i is increased by the deceased spouse’s unused exclusion amount (the deceased spouse’s unused credit shelter). Portability has been made permanent by the enactment of H.R. 8 by Congress (known as the American Taxpayer Relief Act of 2012) on January 1, 2013, and the signing of the bill into law by the President on January 2, 2013. 


The election can only be made by timely filing an estate tax return (Form 706) and making the portability election of the deceased spousal unused exclusion (DSUE) amount.ii Temporary Regulations have been enacted and provide guidance regarding making the Portability election.iii These temporary regulations are effective for estates of decedents dying in 2011 or thereafter,iv and for gifts made in 2011 and thereafter.vThe temporary regulations expire on June 15,

Portability means that consideration will need to be given regarding the filing of an estate estate tax return in every estate where there is a surviving spouse. This will be the only way to ensure the ability of the surviving spouse to use the deceased spouse’s unused exclusion amount. With Portability, Congress has created significantly more work for estate tax return preparers and for the IRS. 

Upon the timely filing of a complete and properly-prepared estate tax return, an “executor” (as defined in IRC Section 2203 and Reg. §20.6018-2) of an estate of a decedent (survived by a spouse) will have elected portability of the decedent's DSUE amount unless the executor chooses not to elect portability by either not timely filing a properly prepared estate tax return or by stating affirmatively on the return that the estate is not electing portability in accordance with instructions set forth for Form 706.  

A return will be considered complete and proper if it is prepared in accordance with the instructions issued for the estate tax return.vii 

In estates for which the executor is not required to file an estate tax return, the estate tax return does not have to include a valuation of assets which pass pursuant to a marital or charitable deduction but must include the description, ownership, and/or beneficiary of such property, along with the information necessary to establish the right of the estate to the marital or charitable deduction. If the return excludes the valuation of assets, the executor must exercise due diligence to estimate the fair market value of such assets. Instructions will provide ranges of dollar values and the executor must identify on the estate tax return an amount corresponding to the particular range within which falls the executor’s best estimate of the total gross estate. Until the instructions are provided, however, the executor must include the executor’s best estimate, rounded to the nearest $250,000, on or attached to the estate tax return signed under penalties of perjury.viii 

The rule allowing the executor to not include valuations of assets does not apply to marital deduction property or charitable deduction property if—

  1. The value of such property relates to, affects, or is needed to determine, the value passing from the decedent to another recipient;
  2. The value of such property is needed to determine the estate's eligibility for the provisions of sections 2032, 2032A, 6166, or another provision of the Code;
  3. Less than the entire value of an interest in property includible in the decedent's gross estate is marital deduction property or charitable deduction property; or 
  4. A partial disclaimer or partial qualified terminable interest property (QTIP) election is made with respect to a bequest, devise, or transfer of property includible in the gross estate, part of which is marital deduction property or charitable deduction property. 

The portability election, once made, becomes irrevocable once the due date of the estate tax return, including extensions actually granted, has passed.ix 

The IRS may examine returns of a decedent in determining the decedent's DSUE amount, regardless of whether the period of limitations on assessment has expired for that return.x


An executor must include a computation of the DSUE amount on the estate tax return.xi Until the IRS provides a form for making such computation a complete and properly-prepared estate tax return will be deemed to include the computation of the DSUE amount. 

The DSUE amount is the lesser of the following amounts:xii

  1. The basic exclusion amount in effect in the year of the decedent ($5,000,000 indexed for inflation), or
  2. The excess of the decedent’s applicable exclusion amount over the sum of (i) the taxable estate of the decedent and (ii) the amount of the adjusted taxable gifts of the decedent. The adjusted taxable gifts are reduced by the amount of gifts, if any, on which gift taxes were paid.

For example, assume husband had prior taxable gifts of $1,000,000 reported on a gift tax return and was not required to pay gift tax on those gifts. Later husband dies in 2012 with a taxable estate of $1,000,000. The executor timely files an estate tax return and elects portability, thereby allowing wife to benefit from husband’s DSUE amount. The DSUE amount is $3,120,000 (the lesser of the $5,120,000 basic exclusion amount in 2012, or the excess of husband’s $5,120,000 applicable exclusion amount over the sum of the $1,000,000 taxable estate and the $1,000,000 amount of adjusted taxable gifts. If gift tax had been paid on any of the taxable gifts, then the DSUE amount would have been increased by the portion of the gifts for which gift tax had been paid. Other examples are set forth in Reg §20.2010-2T(c)(5). 

There is a special rule when assets pass to a qualified domestic trust (“QDOT”). The DSUE amount must be redetermined upon the death of the surviving spouse.xiii It is reduced by the value of the assets in the QDOT at the time of the surviving spouse’s death.xiv 


If the executor of the decedent’s estate elected portability, then in computing a surviving spouse’s gift tax liability on a subsequent gift or estate tax liability upon the death of a spouse, the DSUE amount of a decedent is included in determining a surviving spouse's applicable exclusion amount under section 2010(c)(2), provided that such decedent is the last deceased spouse of such surviving spouse.xv 

If a donor who is a surviving spouse makes a taxable gift and a DSUE amount is included in determining the surviving spouse's applicable exclusion amount, such surviving spouse will be considered to apply such DSUE amount to the taxable gift before the surviving spouse's own basic exclusion amount.xvi This is important if there are multiple deceased spouses and a gift was made by the surviving spouse between marriages. If a surviving spouse applied the DSUE amount of one or more last deceased spouses to the surviving spouse's previous lifetime transfers, and if any of those last deceased spouses is different from the surviving spouse's last deceased spouse at the time of a later taxable gift by the surviving spouse or at the time of the death of the surviving spouse, then the DSUE amount to be included in determining the applicable exclusion amount of the surviving spouse that will be applicable at the time of the later taxable gift or upon the surviving spouse’s death is the sum of (i) the DSUE amount of the surviving spouse's last deceased spouse, and (ii) the DSUE amount of each other deceased spouse of the surviving spouse to the extent that such amount was applied to one or more previous taxable gifts of the surviving spouse.xvii 


The term last deceased spouse means the most recently deceased individual who, at that individual's death after December 31, 2010, was married to the surviving spouse.xviii The subsequent marriage or divorce of the surviving spouse does not change the decedent’s status as the last deceased spouse, unless the new spouse dies prior to the surviving spouse. However, if the surviving spouse’s subsequent spouse dies prior to the surviving spouse, then the portion of the DSUE of the first spouse to die which was not used to shelter gifts disappears. Only the DSUE of the last deceased spouse, if any, can be used by the surviving spouse and then only if properly elected by the executor of the estate of the subsequent spouse.xix If the executor of the subsequent spouse does not file an estate tax return, there will be no DSUE available. 


Now that Portability is permanent, traditional estate planning techniques need to be reexamined. Clients with bypass trusts (also known as exemption trusts or credit shelter trusts) will need to take a look at their estate plans. 

The bypass trust is often used as a tool to utilize the estate tax credit shelter of the deceased spouse. But one of the negatives is that there is no step up in income tax basis upon the death of the surviving spouse with respect to assets contained in the bypass trust. 

If we are able to port the deceased spouse’s credit shelter to the surviving spouse, then the bypass trust is not needed for this purpose. However, before abandoning the use of a bypass trust, consideration needs to be giving to its other purposes, i.e. (i) protecting the deceased spouse’s intentions with respect to the distribution of the deceased spouse’s share of the assets upon the surviving spouse’s death, (ii) protection of the deceased spouse’s assets from the creditors of the surviving spouse, and (iii) sheltering the growth in the deceased spouse’s assets from future estate tax. Finally, the GST Exemption is not portable. An irrevocable trust created at the death of the deceased spouse is necessary to utilize the deceased spouse’s GST Exemption.

Approaches to allow the use of the deceased spouse’s GST Exemption and provide for the protection of the deceased spouse’s assets, yet get the step up in basis upon the death of the surviving spouse need to be considered. One approach would be to use of QTIP trusts as opposed to bypass trusts, and to allocate the decedent’s GST Exemption to the QTIP assets. There will be other issues raised as more professionals experience the effect of the addition of Portability to the estate and gift tax arena.

Article written by: David L. Gianelli


iIRC §2010(2)(B)
iiIRC §2010(c)(5)
iiiReg §20.2010-1T, 2T and 3T and Reg. §25.2510-2T 
ivReg §20.2010-2T(e) and Reg §20.2010-3T(f)
vReg. §20.2505-2T(g)
viReg §20.2010-2T(f), Reg §20.2010-3T(g) and Reg. §20.2505-2T(h)
viiReg §20.2010-2T(a)(7)(i)
viiiReg §20.2010-2T(a)(7)(ii)
ixReg §20.2010-2T(a)(4)
xReg §20.2010-2T(d)
xiReg §20.2010-2T(b)
xiiReg §20.2010-2T(c)
xiiiReg §20.2010-2T(c)(4)
xivReg §20.2010-2T(c)(5) Example (3)
xvReg §20.2010-3T(a)(1)(i) and Reg §20.2505-2T(a)(1)(i) 
xviReg §25.2505-2T(b)
xviiReg §20.2010-3T(b) and Reg §20.2505-2T(c)
xviiiReg §20.2010-1T(d)(5)
xixReg §20.2010-3T(a)(3) and Reg §20.2505-2T(a)(3)

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