IRS issues rules on portability election

The IRS has issued temporary regulations on how to elect to use a deceased spouse’s unused exclusion from estate taxes, also known as the portability election (T.D. 9593). The rules apply to married spouses where the death of the first spouse to die occurs on or after Jan. 1, 2011, and are therefore retroactive. The IRS also issued identical proposed regulations (REG-141832-11).

A lifetime exclusion amount ($5.12 million for 2012) is allowed in the calculation of the gift and estate tax for each individual. Beginning in 2011, spouses can use the unused amount of their deceased spouse’s lifetime exclusion amount if the estate of the deceased spouse elects this treatment on an estate tax return.

Under the regulations, to elect portability, the estate of the first deceased spouse must file an estate tax return by the due date of that return (nine months after death plus any extension), even if the estate would not otherwise be required to file a return under Sec. 6018(a). To make the election, the estate must file a timely “complete and properly-prepared return” (Temp. Regs. Sec. 20.2010-2T(a)(2)). To make this requirement easier for estates that are not required to file a return under Sec. 6018(a), the regulations permit the executor to estimate the gross value of the estate based on a good faith determination of the value of the estate’s assets.

To opt out of the election, if an estate tax return is required to be filed under Sec. 6018(a), the executor must make an affirmative statement on the estate tax return signifying the decision to have the portability election not apply. If no estate return is required under Sec. 6018(a), not filing a return will be considered to be an affirmative statement signifying the decision not to make a portability election.

The election must be made by the estate’s executor. However, if there is no executor, any person in actual or constructive possession of any property of the decedent (a nonappointed executor) may make the election. A portability election made by a nonappointed executor cannot be superseded by a contrary election made by another nonappointed executor of the same decedent’s estate.

The regulations require the executor to calculate the amount of the unused exclusion on the deceased spouse’s estate tax return, and they contain rules for properly calculating that amount. The rules explain how the exclusion applies in a number of specific practical situations, for example, in cases where the surviving spouse has multiple deceased spouses.

To protect the IRS, the regulations permit it to examine the return of a deceased spouse whose spouse had elected portability, without regard to the statute of limitation under Sec. 6501. Since the surviving spouse may live many years past the time the first spouse died, this rule is intended to allow the IRS to make any adjustments that allowing portability might require. 

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.