The Internal Revenue Service issued temporary regulations on the portability of a Deceased Spouse's Unused Exclusion (DSUE). For Decedent's dying in 2011 and 2012, any federal gift and estate tax exemption not used can be transferred to the surviving spouse, provided that a timely filed federal estate tax return is filed.

Don't Blow the Filing Deadline!

The filing deadline for federal portability is 9 months from the date of death, with the ability to obtain an automatic 6 month extension if the extension is filed within 9 months. For Decedents dying between 1/1/11 - 6/30/11 with estates less than $5 million, for portability purposes only, an extension may be filed up until 15 months from the date of death and the return will still be considered timely (IRS Notice 2012-12). There are likely many taxpayers who died between 1/1/11 and now (this Article was written in July 2012) with estates less than $5 million who are unaware of the filing deadline to receive the benefit of portability. Portability benefits likely continue to be forfeited on a daily basis due to lack of information and knowledge by taxpayers and some less careful tax practitioners.

The temporary regulations clarified that the filing deadline applies regardless of the size of the estate. If the filing deadline is missed, then portability is forever lost.

Method of Computing the Portability Amount

The taxpayer can file a timely traditionally prepared federal estate tax return and get the benefit of portability. A computation should be attached to the return showing the amount of unused exemption passing to the surviving spouse.

Estates with values less than the federal estate tax exemption in effect on their death which would not otherwise be required to file a federal estate tax return, do not have to report the value of property which qualifies for the marital or charitable deductions. If that approach is taken, the executor must estimate the value of the gross estate. The IRS will revise the instructions to the federal estate tax return to provide for ranges of value to estimate.

Effect of Gift Taxes Paid

If gift taxes were paid by the Decedent, then portability will apply to the portion of the assets on which gift taxes were paid.

Which Spouse Counts?

The rules regarding which spouse's unused exclusion amount is portable can be complex and confusing. The surviving spouse can only use the Decedent's unused DSUE from the last person that the surviving spouse was married to previously who died while still married to that surviving spouse. If that person had no DSUE or the person's estate elected out of the DSUE provisions, then the DSUE for the surviving spouse is zero.

Example: Susan was married to Bob when he passed away in April 2011. She married Jim in September 2011, but was divorced from him in January 2012. She married Alex in June 2012. Jim died in November 2012. Susan dies in December 2012. Susan's last predeceased spouse is Bob. While she married Jim after Bob died and Bob died before Susan did, Bob was not married to Susan when he died. Similarly, Alex, having not yet died, is also not the last predeceased spouse. Thus Susan's executor would look to Bob's DSUE, if any, in preparing Susan's Form 706.

Nonresidents Who are Not Citizens

The temporary regulations denied portability benefits for nonresident non-citizen Decedents.

Portability for QDOT Trusts

Portability is allowed for Qualified Domestic Trusts (QDOTs) subject to adjustment when subsequent distributions are made from the QDOT.