Transcript Implications of DSUE Portability for Farm Estate Planning

Implications of DSUE Portability
for Farm Estate Planning
Alan Miller
Farm Business Management Specialist
Purdue University
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What is the portability election?
• Allows the estate of married taxpayer to pass the
unused part of his/her applicable exclusion for
federal estate and gift taxation ($5,250,000 in 2013)
to a surviving spouse
– Unused part is referred to as the Deceased Spousal
Unused Exclusion (DSUE) amount
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Measuring the DSUE amount that
is portable?
• DSUE amount is the lesser of:
– The last deceased spouse’s applicable exclusion amount,
and
– The excess of the last deceased spouse’s applicable
exclusion amount over the value of the last deceased
spouse’s taxable estate plus adjusted taxable lifetime gifts
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DSUE Amount Example 1
– Deceased Spouse’s Estate
Husband died in 2011 and left all assets to spouse
$ Amount
outright as sole owner
Husband’s applicable exclusion amount
+ $5,000,000
Minus husband’s taxable estate and gift transfers
Husband’s DSUE amount (portable to surviving
spouse if election is timely filed)
–
$0
=
$5,000,000
The outright transfers to the surviving spouse qualify for the unlimited marital
deduction, and as a result they are not taxable estate transfers. The example assumes
that no lifetime taxable gifts were made by the deceased spouse.
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Portable DSUE Amount Example 1
– Surviving Spouse’s Estate
Surviving spouse dies two years later in 2013
Surviving spouse’s applicable exclusion amount
+
$ Amount
$5,250,000
PLUS husband’s portable DSUE amount ,if portability
+ $5,000,000
election made by husband’s executor
Surviving spouse’s applicable exclusion after adding = $10,250,000
unused amount from last deceased spouse
Assumes that a timely filed portability election was made by last deceased spouse’s executor.
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Portability of DSUE Amount
• TRA 2010 established a portability election for
deaths after December 31, 2010
– both spouses must die after this date
– permits surviving spouse to use DSUE amount
– ATRA 2012 extended portability to 2013 and later years
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Marital Deduction Decreases Taxable
Transfers and Increases DSUE Amount
• Marital deduction is a mandatory deduction equal to
value of all qualifying transfers to surviving spouse
• Marital deduction directly reduces use of deceased
spouse’s applicable exclusion and thus increases
DSUE amount
– prior to portability federal estate tax planning had focused
on avoiding this result
– Deceased spouse’s unused exclusion amount could be lost
due to overqualifying for the marital deduction
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How to Avoid Overqualifying for
the Marital Deduction?
• Transfer property to heirs who don’t qualify for
marital deduction (or charitable deduction)
• Transfer property to surviving spouse in a way that
doesn’t qualify for marital deduction. Examples of
nonqualifying transfers include:
– Transfer to a so-called “credit shelter” trust
– Transfer a life estate to surviving spouse
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DSUE Amount Fixed in Value
Surviving Spouse’s Estate Appreciates
Surviving spouse dies in 2020 instead of 2013
Surviving spouse’s applicable exclusion amount
PLUS husband’s portable DSUE amount
$ Amount
+ $6,250,000
+ $5,000,000
Surviving spouse’s applicable exclusion amount
= $11,250,000
assuming a timely filed portability election was made
Surviving spouse’s taxable estate
= $12,500,000
Taxable transfers in excess of exclusion
= $1,250,000
Assume for simplicity that the surviving spouse owned half of all
marital assets as a joint tenant with survivorship. Assume that
exclusion and assets appreciate in value by 25% from 2011 to 2020.
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Opportunities Portability Offers to
Deceased Spouse’s Estate
• Opportunity to correct for lack of federal estate tax
planning prior to spouse’s death
• Opportunity to pass estate to surviving spouse
outright and yet not lose the unused DSUE amount
• Postmortem opportunity to avoid overqualifying for
marital deduction
– Opportunity to eliminate federal estate tax liability in
situations where surviving spouse’s basic exclusion plus
DSUE amount is greater than surviving spouse’s taxable
estate and gift transfers
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Tax Minimizing Limitations of
DSUE Portability
• Failure to take full advantage of generation-skipping
transfer tax exclusion (outright transfers to a
surviving spouse are not generation-skipping
transfers)
• DSUE amount is fixed while assets transferred to
surviving spouse may appreciate in value
• Limited value in large marital estates with values in
excess of two applicable exclusions ($10,500,000 in
2013)
– How to protect the excess?
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Example Illustrating a Taxable Gift
by a Surviving Spouse
Facts and circumstances: Mrs. Surviving Spouse died in late 2013. Her
first husband died in 2011. His executor made the portability election for
a DSUE amount of $2,000,000. Mrs. Spouse made a taxable gift of
$1,000,000 in 2011 after her first husband’s death. Mrs. Spouse
remarried in 2012. Her new husband died in 2013. His executor made the
portability election for $4,000,000. Mrs. Spouse died later in 2013. What
total DSUE amount is portable to her federal estate tax return?
DSUE Computation
Amount
DSUE amount portable from first deceased spouse due to taxable gift
+ $1,000,000
DSUE amount portable from last deceased spouse
+ $4,000,000
Total DSUE amount portable to surviving spouse’s estate
= $5,000,000
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Making the Portability Election?
• A federal estate tax return must be filed for the first
spouse to die
– Even if filing is not otherwise required
– Must be timely filed, including allowable extension
– Must be complete, as provided for in regulations
– Must indicate DSUE amount
– Estate of surviving spouse is limited to DSUE
amount of last deceased spouse
– Election becomes irrevocable on due date of return
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Will Taxpayers File A Federal Estate
Tax Return Only to Elect Portability?
• Notice 2011-82 stated that the Treasury Department
and the Service anticipate that most (if not all)
married couples will want to ensure the availability
of the DSUE amount to the surviving spouse’s estate
by filing a Form 706, Federal Estate Tax Return, in
order to make the portability election.
– It isn’t clear that taxpayers agree.
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Adapting Neil Harl’s Three Zones to
the Portability Election Decision
• Zone 1 – Marital estate valued no greater than one
spouse’s applicable exclusion ($5,250,000 in 2013)
– Portability election as a protective election
• Zone 2 – Marital estate valued no greater than both
spouses’ combined applicable exclusions
– Portability election as a postmortem DSUE saving election
– Portability election as protective election
• Zone 3 – Marital estate valued at more than both
spouses’ combined applicable exclusions
– More extensive pre-death tax planning required
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Talking Points, page 1
• The portability election should be a valuable tool in
some circumstances
– Expect it to be of more limited usefulness than Congress
intended
• Remains to be seen whether or how farm estate owners’
perceptions of the need for estate planning will change
– Executors of first deceased spousal estates should routinely
consider whether to make the portability election
– The filing requirement associated with this election and
uncertainty about the size of the surviving spouse’s estate
may lead to mistakes (not making the election when it turns
out to be needed)
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Talking Points, page 2
• Other estate planning alternatives, such as credit
shelter trusts, generation-skipping arrangements, and
valuation planning continue to offer significant federal
estate tax saving advantages
– Portability election likely won’t be the best alternative for
accomplishing a farm estate owner’s estate planning
objectives in many situations
• Particularly true for large “taxable” marital estates
• Particularly true when nontax objectives are considered
• Now is an great time to have your estate plans reviewed
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References
• IRS Notice 2011-82, Guidance on Electing Portability of Deceased Spousal
Unused Exclusion Amount, October 2011:
http://www.irs.gov/pub/irs-drop/n-2011-82.pdf
• IRS Notice 2012-21, Marital Portability Election Extension:
http://www.irs.gov/pub/irs-drop/n-12-21.pdf
• Internal Revenue Bulletin 2012-28, pp. 17-31, Temporary regulation T.D.
9593, Portability of Deceased Spousal Unused Exclusion Amount, June 15,
2012: http://www.irs.gov/irb/2012-28_IRB/ar08.html
• Instructions for Form 706, U.S. Estate (and Generation-Skipping
Transfer)Tax Return:
http://www.irs.gov/pub/irs-pdf/i706.pdf
• Congressional Joint Committee on Taxation report JCX 55-10, December
2010: https://www.jct.gov/publications.html?func=showdown&id=3716
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