Editor's Note: The following is an excerpt from 2-38 Trust Administration and Taxation § 38.00[4A] (Matthew Bender)
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act (the "2010 Act") enacted a "portability" feature; it lets a surviving spouse take advantage of any unused estate tax exemption of a predeceased spouse. (2010 Act §303.) That opportunity means that an estate tax return must be filed in order to capture the amount of the first spouse's unused exemption. (A return might not otherwise be required if the predeceased spouse's gross estate is under $5 million in value.) This feature will expire at the end of 2012 unless extended by legislation.
A deceased spousal unused exclusion amount is available to a surviving spouse only if an election is made on a timely filed estate tax return (including extensions) of the predeceased spouse on which such amount is computed, whether or not the estate of the predeceased spouse otherwise is required to file an estate tax return. In addition, notwithstanding the statute of limitations for assessing estate or gift tax with respect to a predeceased spouse, the Secretary of the Treasury may examine the return of a predeceased spouse to decide whether the deceased spouse's unused exclusion amount is available for use by the surviving spouse. (The Secretary of the Treasury shall prescribe the appropriate and necessary regulations to carry out the rules described in this paragraph.)
1. Estate Tax Exclusion Amount Definition Change. The portability concept is accomplished by amending IRC § 2010(c) to provide that the estate tax applicable exclusion amount is (1) the "basic exclusion amount" ($5.0 million, indexed from 2010 beginning in 2012), plus (2) for a surviving spouse, the "deceased spousal unused exclusion amount." [§ 2010(c)(2), as amended by the 2010 Act § 302(a).]
2. Deceased Spousal Unused Exclusion Amount. The "deceased spousal unused exclusion amount" is the lesser of (1) the basic exclusion amount or (2) the basic exclusion amount of the surviving spouse's last deceased spouse over the combined amount of the deceased spouse's taxable estate plus adjusted taxable gifts (described in new § 2010(c)((4)(B)(ii) as "the amount with respect to which the tentative tax is determined under section § 2001(b)(1)"). The first item limits the unused exclusion to the amount of the basic exclusion amount. Therefore, if the estate tax exclusion amount decreases by the time of the surviving spouse's death, the lower basic exclusion amount is the limit on the unused exclusion of the predeceased spouse that could be used by the surviving spouse. The second item is the last deceased spouse's remaining unused exemption amount, defined as the predeceased spouse's basic exclusion amount less the combined amount of taxable estate plus adjusted taxable gifts of the predeceased spouse, thus imposing a so-called "privity" requirement.
3. No Statute of Limitations on Reviewing a Predeceased Spouse's Estate to Determine Unused Exclusion Amount. Notwithstanding the statute of limitations on assessing estate or gift taxes for the predeceased spouse, the IRS may examine the return of a predeceased spouse at any time for purposes of determining the deceased spousal unused exclusion amount available for use by the surviving spouse. IRC § 2010(c)(5)(B), as amended by the 2010 Act § 303(a).
4. There Must Be a Timely Filed Estate Tax Return and Election for the Predeceased Spouse's Estate. The executor of the predeceased spouse's estate must file an estate tax return on a timely basis and make an election to permit the surviving spouse to utilize the unused exemption. § 2010(c)(5)(A), as amended by the 2010 Act §303(a). (Therefore, even small estates of married persons must consider whether to file an estate tax return for the first deceased spouse's estate.)
5. Only the Last Deceased Spouse's Unused Exclusion Amount Applies. Only the most recent deceased spouse's unused exemption may be used by the surviving spouse. IRC § 2010(c)(5)(B)(i), as amended. An explanation of the 2010 Act by the Joint Committee on Taxation reiterates that this requirement applies even if the last deceased spouse has no unused exclusion and even if the last deceased spouse does not make a timely election. [Joint Committee on Taxation, Technical Explanation of the Revenue Provisions Contained in the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" (JCX-55-10), at 52 n.57 (Dec. 10, 2010).]
6. Portability Applies for Gift Tax Purposes. Portability applies for the gift exemption as well as the estate exemption. 2010 Act § 303(b)(1) amends IRC § 2505(a)(1), which describes the "applicable credit amount" for gift tax purposes, by referring to the applicable credit amount under §2010(c) "which would apply if the donor died as of the end of the calendar year...." (Under §2505(a)(2), the credit amount is further reduced by the amounts of credit allowable in preceding years.) The applicable credit amount under §2010(c) includes the deceased spousal unused exclusion amount, so that amount is also included in the gift exemption amount.
7. Portability Does Not Apply for GST Tax Purposes. Portability does not apply to the GST exemption.
8. Effective Date - Decedents Dying After 2010. The provision applies to the estates of decedents dying and gifts made after 2010. [2010 Act § 303(c)(1).] The Joint Committee on Taxation Technical Explanation takes the position that portability applies only if the first spouse dies after 2010.
Available for Two Years. Like the rest of the estate and gift tax provisions in the 2010 Act, the portability provision expires after 2012. Although the anticipation is that Congress will extend this benefit after 2012, there are no guarantees.
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