Federal Law News Flash!

On June 15, 2012, Treasury issued temporary and proposed regulations which give clarity and guidance as to the application, use and limitations on the portability of the unused estate tax exemption of the first spouse to die. In particular, the IRS clarified how the portable amount of estate tax exemption is calculated, and how that amount can be used by the surviving spouse, both for lifetime gifts as well as at death. Treasury calculates the surviving spouse’s exemption in a way that is favorable to taxpayers: The first spouse’s unused exemption (calculated in the year of death and pursuant to a timely filed U.S. Estate Tax Return) is added to the surviving spouse’s exemption. This means that if the first spouse dies in 2012 with $5 million in unused exemption; his estate timely files a Form 706; and surviving spouse dies in 2013 with a $1 million exemption because of the change in federal law, the surviving spouse’s estate will have a $6 million total exemption. Earlier, commentators had interpreted the statute as limiting the surviving spouse’s total exemption to two times the exemption available at the survivor’s death (or a total of $2 million in the example described above). This favorable interpretation makes it even more important to consider filing a Form 706 at the first death.