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.

Portability Election for Estates of Decedents Dying in First Half of 2011

For decedents dying in 2011 or 2012 with a surviving spouse, the "deceased spouse’s unused exclusion" (DSUE) amount can be added to the surviving spouse’s estate tax exemption, subject to a number of restrictions. This means that the surviving spouse could potentially double his or her estate and gift tax exemption, but only if a timely filed U.S. Estate Tax Return (Form 706) is filed. The return is due nine months after date of death, but can be extended for six months by filing Form 4768. The IRS recently issued Notice 2012-21, 2012-10 IRB; IR 2012-24 extending the deadline to file the Form 706 for decedents dying in the first half of 2011 to fifteen months after the date of death, but only for "qualifying estate" defined as estates with a surviving spouse and the gross estate does not exceed $5 million. The estate must file Form 4768 by 15 months after date of death to receive this extension, even if Form 706 was filed before the 15 months (but after the 9-month) deadline. For more information, go to IRS Notice 2012-21.

2011 Form 706 and Instructions Released by IRS

The IRS has posted on its website the forms for the U.S. Estate Tax Return (Form 706) and instructions for estates of decedents dying in 2011. The IRS previously released Form 706 and instructions for estates of decedents who died in 2010. We are still waiting for the release of Form 8939 for estates of 2010 decedents to elect out of the estate tax system and into the carryover basis system. Click here for the IRS forms and instructions.

Guidance on 2011 Decedents and "Portability"

The IRS just released new guidance for personal representatives regarding electing portability of the deceased spouse’s unused estate tax exclusion amount and to potentially double the estate tax exemption that will be available at the surviving spouse’s later death. Notice 2011-82 confirms that the "portability" election must be made on a timely filed Federal Estate Tax Return (Form 706) and provides that the timely filing of a Form 706 "prepared in accordance with the instructions" will constitute the making of the portability election; therefore, by simply filing the Form 706, the estate will be considered to have elected portability "without the need to make an affirmative statement, check a box, or otherwise affirmatively elect." The Notice also provides that an estate may avoid making the election by following the instructions for the Form 706, which describe the necessary steps. For more information, go to http://www.irs.gov/pub/irs-drop/n-11-82.pdf.

IRS Extends Deadline for Form 8939 to January 17, 2012

The IRS issued Notice 2011-76 on September 13, 2011, extending the due date for Form 8939 from November 15, 2011 to January 17, 2012.  This form must be filed by Estates of 2010 decedents electing out of the estate tax system and into the carryover basis system.

The IRS also noted that estates of 2010 decedents may file Form 4768 to extend the due date for the Form 706 from September 19, 2011 to March 19, 2012, and that no penalties will be imposed for late payment of tax before that date.  Interest will still be assessed on late payments of tax, but the penalties will not apply.

See Notice 2011-76 for more details.

Final 2010 Form 706 and Instructions

After some confusion with initially posting an older version of the instructions, the IRS has posted both the Final Form 706 for decedents dying in 2010, and the Instructions.  The Form 706 is due September 19, 2011 for 2010 decedents who are not electing out of the estate tax regime and into the carryover basis regime, pursuant to the December 2010 Tax Act.  As mentioned in an earlier blog, you may wish to file Form 4768 prior to September 19, 2011 to extend the due date for filing the return for six months, to give yourself more time to determine which regime to file under.  To see the instructions, go to http://www.irs.gov/pub/irs-pdf/i706.pdf.

2011 Decedents and "Portability"

If a 2011 decedent is the first spouse to die, then in order for the surviving spouse to potentially double the estate tax exemption that will be available at his or her later death, under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) “portability” of the deceased spouse’s unused estate tax exemption must be elected on a timely filed U.S. Estate Tax Return (Form 706).  A draft of the 2011 Form 706 was released by the IRS on August 26, 2011, but does not seem to include a place to elect portability.  You may want to file a Form 4768 by the due date of the Form 706 (usually 9 months after date of death) to request an automatic 6-month extension and perhaps by then the manner of electing portability will be clear. See our January 2011 newsletter for a more complete discussion of this Act.

Form 706 Deadline is Near!

The deadline for filing a U.S. Estate Tax Return (Form 706) for a 2010 decedent is September 19, 2011 under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Act"). If you are still unsure whether or not to file a Form 706 or the Form 8939 that is due November 15, 2011 to elect out of the estate tax system and into the carryover basis system, then you probably want to file a Form 4768, application for automatic 6-month extension of time to file. See our January 2011 newsletter for a more complete discussion of the Act.