Claiming Estate Tax Portability
Portability allows a surviving spouse to claim a deceased spouse’s unused estate tax exclusion. Portability was made permanent in 2013. This unused exclusion is referred to as the “Deceased Spousal Unused Exclusion” or DSUE amount.
A surviving spouse may apply the DSUE amount received from the decedent spouse’s estate against any tax liability arising from subsequent lifetime gifts and transfers at death.[1] To claim portability, the deceased spouse’s personal representative must make such an election with the estate tax return.[2]
The estate must file Form 706 to transfer the DSUE amount to the surviving spouse regardless of the size of the estate. If Form 706 is not timely filed by the original or extended due date, portability is lost.
The election is effective as of the deceased spouse’s date of death. The DSUE amount equals the deceased spouse’s exclusion less any amount applied to the deceased spouse’s gross estate and lifetime taxable gifts.
A surviving spouse may only use the DSUE amount of his or her last deceased spouse. This is the most recently deceased person who was married to the surviving spouse at the time of death.[3]
The last deceased spouse is determined on the date of a taxable gift by the surviving spouse or the death of the surviving spouse. Remarriage does not bar application of the DSUE amount of a previously deceased spouse. If a surviving spouse has multiple deceased spouses he or she may use the DSUE amount of each spouse in succession for lifetime gifts, but the DSUE amount of a predeceased spouse cannot be applied after the death of a subsequent spouse.[4]
Portability is not permitted if the deceased spouse was a nonresident and not a U.S. citizen at the time of death. A nonresident surviving spouse who is not a citizen may only claim a DSUE amount to the extent permitted by treaty; for example, under the Canada-US tax treaty, a nonresident, noncitizen decedent is granted an estate tax credit equal to the greater of $13,000 or the amount with the same ratio to a US decedent’s applicable credit amount as the value of the non-US decedent’s domestic gross estate has to his or her total worldwide gross estate.[5] Identical provisions are found in treaties with several other countries.[6]
If a qualified domestic trust is used to bequeath property to a surviving spouse who is not a U.S. citizen, estate tax is imposed as distributions are made from the trust. However, a representative should determine a preliminary DSUE amount when electing portability.
This amount decreases as distributions are made from the trust. Since the final DSUE amount will not be determined until the death of the surviving spouse, it may not be applied to lifetime gifts made by the surviving spouse.
Estate and Gift Tax Considerations – When Do You Need to File Form 706?
Lifetime transfers of money or property may be subject to the federal gift tax, while money or property owned at death may be subject to the federal estate tax. Recipients of gifts or inheritance are generally not responsible for estate or gift tax and have no income tax liability on the value of the gift or inheritance. A donor or decedent cannot deduct gifts or bequests for federal income tax purposes other than charitable contributions.
Form 706: Estate Tax
The personal representative must file Form 706 if the gross estate exceeds the exclusion amount. The basic exclusion amount as determined by the date of death is $5,250,000 (2013), $5,340,000 (2014), and $5,430,000 (2015).
Any DSUE amount received from a deceased spouse is added to determine the estate’s total applicable exclusion amount. Estates that do not exceed the exclusion amount still must file if electing portability for a surviving spouse.
Practice tip: Require any surviving spouse to sign a waiver of the portability election. I use a check the box method and allow the client to initial their preference and sign with a notary.
The gross estate includes all property in which the decedent had an interest in at death.[7] This includes all transfers effective at death, revocable transfers, and transfers in which the decedent retained possession, enjoyment or income of the property.[8]
It also includes certain life insurance policies and annuities payable to the estate or heirs and certain property transferred within three years of death.[9] Property is valued at its fair market value at death. A decedent’s taxable estate is calculated by reducing the gross estate by allowable deductions.
Deductions include administration and funeral expenses paid by the estate, mortgages and other debts owed by the decedent at death, and casualty losses. Deductions are also permitted for property that passes to a surviving spouse (the marital deduction), donations to a political subdivision or qualifying charity (the charitable deduction), or payments to a state as a result of the decedent’s death (the state death tax deduction).[10]
Both U.S. citizens and residents are subject to the Estate Tax. The estates of nonresident, noncitizens must file Form 706-NA. Form 706 is due with any tax payments within nine months after the date of death.
An automatic six-month extension for both filing and payment is available with the filing of Form 4768. The personal representative should include supplemental documents such as a death certificate, relevant wills or trusts, appraisals, documents related to litigation involving the estate, and documentation of any unusual items on the return. The personal representative is personally liable for filing the return.
After an estate tax return is accepted, the IRS will send an Estate Tax Closing Letter to the personal representative. Assuming there are no mistakes or special circumstances, the representative will receive the closing letter after 4-6 months.
The estate will then usually terminate upon the distribution of assets to beneficiaries. An estate may terminate automatically for federal income tax purposes if settlement of the estate is prolonged unreasonably.
If you have questions on this legal topic, feel free to contact Elliott Stapleton, a Cincinnati Estate Planning and Probate Attorney – (513) 334-0099 123 Boggs Lane Cincinnati, Ohio 45246.
References:
[1] I.R.C. § 2010(c)(4).
[2] I.R.C. § 2010(c)(5)(A).
[3] Treas. Reg. § 20.2010-1T(d)(5).
[4] Treas. Reg. § 20.2010-3T.
[5] Income Tax Convention, U.S.-Can., art. XXIX, para. 2, Jan. 1, 1985; Tracy Blake DeVlieger and Tiffany B. Carmona, The Rules of Portability, American Bar Association, 4-5, http://www.americanbar.org/content/dam/aba/publications/rpte_ereport/2011/Dec_2011/te_devlieger_carmona.pdf-89k-2012-10-19.
[6] Ashley A. Weyenberg, Highlights and Pitfalls for Non-US Citizen Surviving Spouses – The Estate Tax Marital Deduction and the Dilemmas of Portability, American Bar Association, FN 14, http://www.americanbar.org/content/dam/aba/publishing/rpte_ereport/2013/2_april/te_weyenberg.pdf-53k-2013-04-09 (citing treaties in Australia, Finland, France, Germany, Greece, Italy, Japan, Norway and Switzerland, in addition to Canada).
[7] I.R.C. § 2031(a).
[8] I.R.C. §§ 2036-38.
[9] I.R.C. §§ 2035, 2039, 2042.
[10] I.R.C. §§ 2053-58.
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