IRS Issues Guidance on Electing Portability of Deceased Spousal Unused Exclusion Amount

The Internal Revenue Service has issued guidance on electing portability of the unused exclusion of a deceased spouse. Notice 2011-82, which was issued on September 29, 2011, reminds estates of deceased married individuals to file a Federal estate tax return to transfer the decedent’s unused gift and estate tax exclusion amount to the surviving spouse.

Tax practitioners have been achieving portability with estate planning techniques (credit shelter dispositions) for decades, but portability didn’t become a part of the tax laws until the Tax Relief Act of 2010, which was signed into law on December 17, 2010.  This new feature allows the estates of predeceased spouses to pass any unused exclusion amount (currently $5 million) to the surviving spouse.

For example, a decedent who used $3 million of his $5 million exclusion amount can pass the remaining $2 million on to his surviving spouse.  This will increase the surviving spouse’s exclusion amount from the usual $5 million to $7 million, assuming the surviving spouse does not remarry.

Since portability can only be elected on a timely-filed estate tax return of the predeceased spouse, a failure to file the return could result in loss of the opportunity.  Even if the predeceased spouse’s estate is not large enough to require a Federal estate tax return (Form 706), executors should consider filing a return solely to make the portability election.

The portability election is available to estates of decedents who died after December 31, 2010.  Given that the Federal estate tax returns are due 9 months from the date of death, the first estate tax returns for estates that are eligible to make the portability election were due as early as October 3, 2011. If an estate is unable to meet this deadline, it can request an automatic six-month extension by filing Form 4768.

The IRS is working on regulations to provide further guidance on the portability election and is looking for input from the public.  Specifically, the IRS is asking for comments on the following issues:

1. The determination in various circumstances of the deceased spousal unused exclusion amount and the applicable exclusion amount;
2. The order in which exclusions are deemed to be used;
3. The effect of the last predeceasing spouse limitation described in section 2010(c)(4)(B)(i);
4. The scope of the Service’s right to examine a return of the first spouse to die without regard to any period of limitation in section 6501; and
5. Any additional issues that should be considered for inclusion in the proposed regulations.

To be considered, comments must be submitted in writing by October 31, 2011, using one of the following ways:

1. By mail to CC:PA:LPD:PR (Notice 2011-82), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC  20044.
2. Electronically to Notice.Comments@irscounsel.treas.gov.  Please include “Notice 2011-82” in the subject line of any electronic communications.
3. By hand-delivery Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2010-82), Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave., NW, Washington, DC  20224.