Portability Regulations

Capital Letter No. 37

June 1, 2015

Ronald D. Aucutt

Final portability regulations will be published in the next two weeks.

Dear Readers Who Follow Washington Developments:

BACKGROUND

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Public Law 111-312 (“the 2010 Tax Act”), was signed into law on December 17, 2010. Section 303 of the 2010 Tax Act provided for the portability of the unified credit between spouses, with an effective date of January 1, 2011. The “American Taxpayer Relief Act of 2012,” Public Law 112-240 (“ATRA” or just the “2012 Tax Act”), signed into law on January 2, 2013, made portability (and the rest of the 2010 Tax Act) permanent, with a technical correction proposed by the staff of the Joint Committee on Taxation to change “basic exclusion amount” to “applicable exclusion amount” in section 2010(c)(4)(B)(i).

Section 7805(b)(2) of the Internal Revenue Code permits regulations to be retroactive only if they are issued within 18 months of the date of enactment of the statutory provisions to which the regulation relates. Eighteen months from the enactment of the 2010 Tax Act on December 17, 2010, was June 17, 2012, which was a Sunday. Temporary regulations (T.D. 9593, 77 Fed. Reg. 36150 (June 18, 2012)) and identical proposed regulations (REG-141832-11, id. at 36229) were released on Friday, June 15, 2012, the very last day that permitted them to be retroactive to January 1, 2011. Public comments on the proposed regulations were invited by September 17, 2012, and a public hearing, if requested, was scheduled for October 18, 2012, but no one asked for a hearing and the hearing ultimately was cancelled.

Under section 7805(e)(2) of the Code, the temporary regulations will expire three years after they are issued, in other words on June 15, 2015. The current Treasury-IRS Priority Guidance Plan includes an item described as “Final regulations under §§2010 and 2505 regarding portability of the deceased spousal unused exclusion.” Because it is crucial that the portability regulations be retroactive to January 1, 2011, we can expect the regulations to be finalized by June 15. History suggests they might be finalized exactly on June 15, which is the Monday before the ACTEC summer meeting in Quebec City.

MAJOR HELPFUL PROVISIONS OF THE TEMPORARY REGULATIONS

In the main, the temporary and proposed regulations were very accommodating to taxpayers. Here are some examples. We should expect the regulations to be finalized with few if any major changes in these provisions.

Due Date of the Election

Section 2010(c)(5) provides that portability be elected on an estate tax return filed within “the time prescribed by law (including extensions) for filing such return.” While most readers understood that to mean nine months after a decedent’s death (or 15 months if extended), a theory began circulating that if a return is not required for estate tax purposes (if, for example, the value of the estate is less than the basic exclusion amount), then such a return is never “due,” and portability can be elected any time, perhaps even by the surviving spouse’s executor. Without really addressing the merits of that theory, the preamble to the June 2012 temporary and proposed regulations explains that requiring the due date to be determined in the usual way whether or not a return is otherwise required for estate tax purposes “will benefit the IRS as well as taxpayers choosing the benefit of portability because the records required to compute and verify the DSUE amount [which is what the regulations call the deceased spousal unused exclusion amount] are more likely to be available at the time of the death of the first deceased spouse than at the time of a subsequent transfer by the surviving spouse by gift or at death, which could occur many years later.”

Accordingly, Reg. §20.2010-2T(a)(1) through (4) confirm that the portability election must be made on a timely filed estate tax return of the predeceased spouse, that timeliness is determined in the usual way whether or not a return is otherwise required for estate tax purposes, that the election is deemed made by the filing of a return unless it is affirmatively repudiated, and that the election is irrevocable.

While additional relaxation of the due date might be appropriate, it is clear that such relief must come from Congress.

One ironic consequence of the semantic skirmish over the due date of the election when no return is required for estate tax purposes is that the due date is now sufficiently clarified by regulations to make the election a “regulatory election” permitting relief in the form of an extension of time under Reg. §301.9100-3 (so-called “9100 relief”). And on January 27, 2014, the Service published Rev. Proc. 2014-18, 2014-7 I.R.B. 513, providing a simplified method, through December 31, 2014, to obtain an extension of time to make the “portability” election with respect to the estate of a decedent who died in 2011, 2012, or 2013 survived by a spouse. Rev. Proc. 2014-18 noted that executors who can benefit from this relief include executors of decedents who were legally married to same-sex spouses. Those executors could not have known that portability would be available for same-sex married couples until the Supreme Court decided United States v. Windsor, 570 U.S. ___, 133 S. Ct. 2675 (2013), on June 26, 2013, and the Service issued Rev. Rul. 2013-17, 2013-38 I.R.B. 201, on August 29, 2013. The relief provided by Rev. Rul. 2014-18, however, applied to all married persons who died in 2011, 2012, and 2013 for whom an estate tax return was not required, not just to same-sex married couples.

Who May Make the Election

Reg. §20.2010-2T(a)(6) confirms that the election may be made by an appointed executor or administrator of, if there is none, “any person in actual or constructive possession of any property of the decedent.” This reflects the notion of what is often called a “statutory executor,” after the definition in section 2203. Such a “non-appointed executor” could (and often will) be the surviving spouse himself or herself. The regulation adds that a portability election made by a non-appointed executor “cannot be superseded by a contrary election made by another non-appointed executor.”

Simplified Rules for Reporting Values

In what is perhaps the most significant and welcome provision of the regulations, Reg. §20.2010-2T(a)(7)(ii) provides special rules for reporting the value of property on an estate tax return filed to elect portability but not otherwise required for estate tax purposes. Although the regulations do not explicitly authorize the promulgation of a “Form 706-EZ” for such uses, as many have advocated, they achieve results that could be nearly equivalent in many common circumstances.

Under Reg. §20.2010-2T(a)(7)(ii)(B), the value of property qualifying for a marital or charitable deduction (which does not use any unified credit anyway) need not be stated, if the executor “exercises due diligence to estimate the fair market value of the gross estate.” Pending the publication of instructions to the estate tax return, the regulations provided that this due diligence could be shown by provision of “the executor’s best estimate, rounded to the nearest $250,000,” of that value. When the instructions were first published in October 2012, they included a “Table of Estimated Values” modifying this “nearest $250,000” convention only by requiring that the rounding always be up to the next higher multiple of $250,000, except for a total value greater than $5 million and less than or equal to $5.12 million (the 2012 exclusion amount), which was rounded to $5.12 million. The current (August 2014) instructions are similar, adjusted for the 2014 exclusion amount of $5.34 million.

More rigorous valuation of marital or charitable deduction property is still needed in the case of formula bequests, partial disclaimers, partial QTIP elections, split-interest transfers, and eligibility for tax treatment that is affected by such values. As examples of such tax treatment, Reg. §20.2010-2T(a)(7)(ii)(A)(2) cites sections 2032, 2032A, and 6166. If any of those sections apply, a return will often be required for estate tax purposes anyway.

Reg. §20.2010-2T(a)(7)(ii)(A) requires the reporting of “only the description, ownership, and/or beneficiary of such property, along with all other information necessary to establish the right of the estate” to the marital or charitable deduction. As examples of this last requirement, Reg. §20.2010-2T(a)(7)(ii)(C), Example 1, cites “evidence to verify the title of each jointly held asset, to confirm that [the surviving spouse] is the sole beneficiary of [a] life insurance policy and [a] survivor annuity, and to verify that the annuity is exclusively for the surviving spouse’s] life.” It is possible that such evidence will actually be more in some cases than the information normally provided with an estate tax return.

But it is clear that in the paradigm case of a married couple with a home, modest tangible personal property, bank account, and perhaps an investment account – all possibly jointly owned – and life insurance and retirement benefits payable to the survivor, the requirements for completing an estate tax return to elect portability have been made relatively manageable, especially considering that the surviving spouse is likely to be the “non-appointed executor” with respect to all the property.

Examination and Disclosure

Reg. §§20.2010-2T(d), 20.2010-3T(d), and 25.2505-2T(e) reiterate, without elaboration or example, the authority of the IRS to examine returns of a decedent, after the period of limitations on assessment has run, for the limited purpose of determining the decedent’s DSUE amount, if the portability election has been made. For this purpose, Reg. §20.2010-3T(d) confirms that “the surviving spouse is considered to have a material interest that is affected by the return information of the deceased spouse within the meaning of section 6103(e)(3).” That means the IRS is authorized to disclose the deceased spouse’s estate tax return information to the surviving spouse, which is sometimes cited as a reason for opting out of the portability election in rare cases.

Application and Ordering

In response to several comments, Reg. §20.2010-2T(c)(2) provides that the computation of a predeceased spouse’s DSUE amount will disregard amounts on which gift taxes were paid by the decedent because taxable gifts in that year exceeded the applicable exclusion amount but the larger estate tax applicable exclusion amount on the date of death exceeded the total adjusted taxable gifts.

Reg. §§20.2010-3T(a) and 25.2505-2T(a) confirm that the DSUE amount of the last deceased spouse dying after 2010 is available both to the surviving spouse for gift tax purposes and to the surviving spouse’s estate for estate tax purposes. Neither remarriage nor divorce will affect that availability, but the death of a subsequent spouse will terminate the availability of the DSUE amount from the previous last deceased spouse. This is true no matter how much DSUE amount, if any, of the previous last deceased spouse is still unused, and whether or not the new last deceased spouse has any DSUE amount or whether or not the executor of the new last deceased spouse even made a portability election.

Reg. §25.2505-2T(b) creates an ordering rule providing that when the surviving spouse makes a taxable gift, the DSUE amount of the last deceased spouse (at that time) is applied to the surviving spouse’s taxable gifts before the surviving spouse’s own basic exclusion amount. Reg. §§25.2505-2T(c) and 20.2010-3T(b) provide rules that retain the DSUE amounts of a previous last deceased spouse that the surviving spouse has used for previous gifts in the future calculations of either gift tax or estate tax, in order to accommodate the cumulative nature of those tax calculations. The effect of these rules is to permit a surviving spouse, by making gifts, to benefit from the DSUE amounts of more than one predeceased spouse.

ANOTHER PORTABILITY ISSUE

A related item on the current Treasury-IRS Priority Guidance Plan is entitled “Revenue Procedure under §2010(c) regarding the validity of a QTIP election on an estate tax return filed only to elect portability.” This was the only new item in the 2013-2014 Priority Guidance Plan, and it was discussed in Capital Letter Number 34 of August 12, 2013. Capital Letter Number 34 predicted that the contemplated Revenue Procedure would eventually affirm the validity of a QTIP election made on an estate tax return not needed for estate tax purposes but filed to make the portability election. There is no reason to change that prediction. But unlike the temporary regulations that are constrained by section 7805, there is no reason to expect this item to be addressed this month, although there is no doubt that Treasury and the IRS are working on it.

Ronald D. Aucutt