On June 15, 2012, the IRS issued temporary regulations concerning portability of unused federal estate tax exemption between spouses. While the temporary regulations clarify some information, the overriding question remains: Will portability be extended beyond 2012? Experts in the field have mixed opinions. Some think Congress would not have created this portability without the thought of extending it beyond 2012. Others think Congress will fail to do anything, and as a result portability will end in 2012.
So what is portability? Generally speaking, portability refers to the ability of a spouse to take advantage of the unused estate tax exemption of a deceased spouse. (Referred to by the IRS as the "deceased spousal unused exclusion amount", or "DSUE" amount). So, if husband dies today leaving everything to wife, husband will not use his estate tax exemption. If wife elects portability, she could then use both her exemption, and husband''s to pass property free from estate tax at her death.
The regulations clarify a few things:
- An affirmative election must be made by the surviving spouse to use the unused amount. This election is made by filing an estate tax return (IRS Form 706) for the deceased spouse, even if the return would not otherwise be required. The fiduciary will not be required to exactly value all of the estate property, but must make a good faith estimate.
- A spouse that remarries after the death of the first spouse can use the unused exemption of the "last deceased spouse." and not of prior spouses
- The IRS has the ability to examine the estate tax return of the first spouse to die at the death of the second spouse, regardless of the usual statute of limitations, to ensure the unused exemption amount
More questions are sure to arise as more couples have the opportunity to use portability. Hopefully more guidance will come. You can find the text of the Federal Register discussion of the regulations here. The Iowa State Center for Agricultural Law and Taxation released a short article summarizing the temporary regulations here.