Lewis Saret, for Forbes writes: In our last post (SEE BELOW) we discussed what estate tax portability,
made permanent by the American Tax Relief Act of 2012, does. This post
gives an overview of what executors must do in order to elect
portability. Below are the 2 previous entries from Lewis Saret for Forbes on Estate Planning.
In order to take advantage of estate tax portability, temporary regulations issued by the Treasury Department, require executors who want to make a portability election, to make such election on a timely filed and properly prepared estate tax return.
Comment: The conventional wisdom regarding portability has always been that it would greatly simplify estate planning for married couples. However, the requirement that an estate tax return be filed in order to elect portability significantly reduces such benefits because estate tax returns are complicated and expensive to prepare. Unfortunately, it appears that the alternatives available to the government are limited due to the need for certain types of information that are required for tax administration purposes.
When must the election be made? For the purposes of making the portability election, the executor must file an estate tax return by the due date of the estate tax return (i.e., nine months after the date of the decedent’s death), including extensions actually granted.
Post filing changes. The temporary regulations issued by the Treasury Department provide that the last estate tax return that is filed by the due date of the estate tax return, including extensions granted, will supersede any previously-filed return. As a result, an executor may supersede a previously-filed portability election on a subsequent timely-filed estate tax return if the executor satisfies the requirements set forth in the temporary regulations, which generally set forth how to affirmatively elect out of portability.
Note. The temporary regulations provide guidance when contrary elections are made by more than one person who is permitted to make the portability election under the temporary regulations.
Caution. The temporary regulations provide that a portability election is irrevocable once the due date, as extended, of the return has passed.
This posts discusses the basics of how to make the portability election. Future posts will discuss several issues that the temporary portability regulations raise.
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In order to take advantage of estate tax portability, temporary regulations issued by the Treasury Department, require executors who want to make a portability election, to make such election on a timely filed and properly prepared estate tax return.
Comment: The conventional wisdom regarding portability has always been that it would greatly simplify estate planning for married couples. However, the requirement that an estate tax return be filed in order to elect portability significantly reduces such benefits because estate tax returns are complicated and expensive to prepare. Unfortunately, it appears that the alternatives available to the government are limited due to the need for certain types of information that are required for tax administration purposes.
When must the election be made? For the purposes of making the portability election, the executor must file an estate tax return by the due date of the estate tax return (i.e., nine months after the date of the decedent’s death), including extensions actually granted.
Post filing changes. The temporary regulations issued by the Treasury Department provide that the last estate tax return that is filed by the due date of the estate tax return, including extensions granted, will supersede any previously-filed return. As a result, an executor may supersede a previously-filed portability election on a subsequent timely-filed estate tax return if the executor satisfies the requirements set forth in the temporary regulations, which generally set forth how to affirmatively elect out of portability.
Note. The temporary regulations provide guidance when contrary elections are made by more than one person who is permitted to make the portability election under the temporary regulations.
Caution. The temporary regulations provide that a portability election is irrevocable once the due date, as extended, of the return has passed.
This posts discusses the basics of how to make the portability election. Future posts will discuss several issues that the temporary portability regulations raise.
_________
Estate Tax Portability - New Paradigm For Estate Planning
On January 1, 2013, Congress passed the American Tax Relief
Act of 2012 (“ATRA”), which President Obama signed on January 2, 2013.
One of the key provisions of ATRA is to make permanent the so-called portability of the applicable exclusion amount between spouses, which was enacted by Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
This post will begin a discussion of the portability rules, which greatly impacts estate planning.
The first issue regarding portability is what does portability do?
The answer is that portability allows the first spouse to die to transfer his/her unused estate tax applicable exclusion amount to the surviving spouse, who can then use it for his/her gift or estate tax purposes.
More specifically, if the estate of the first spouse to die makes the appropriate portability election, the surviving spouse’s applicable exclusion amount may be calculated as follows:
Example. George and Barbara are married. George dies in 2011 and his estate makes the portability election. Assume the DSUE amount from George’s estate is $4 million. In 2013, when the basic applicable exclusion amount equals $5.25 million, Barbara dies. Here, the applicable exclusion amount available to Barbara’s estate equals $9.25 million, which is calculated as follows:
Any applicable exclusion amount of the first spouse to die that is used to reduce the estate tax liability of that spouse’s estate tax reduces the amount of the excess applicable exclusion amount that carries over to the surviving spouse in the form of the “deceased spousal unused exclusion amount” or DSUE amount.
In this regard, the DSUE equals the lesser of the following two items:
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This past spring, Congress passed a number of important tax
provisions that will impact how taxpayers manage their assets and
estates. One of particular significance is the American Tax Relief Act
of 2012, or “ATRA”. Encompassed within ATRA are a number of new tax
provisions that can have a substantial impact on estate planning
strategies. Fortunately, many of these provisions are very beneficial
for your estate planning going forward. In this and the next few posts,
we will explore the impact of ATRA on estate and gift planning, and
strategies for planning under the new rules.
First, a little history on the enactment of ATRA. At the start of 2013, Congress and President Obama signed into law ATRA, which basically makes permanent many of the tax reduction or deduction provisions originally enacted in 2001 as part of the Economic Growth and Tax Relief Reconciliation Act or “EGTRRA”. This means ATRA has no built-in sunset provision and, pending other legislation, will not expire. Since EGTRRA included a sunset provision that set its expiration for Dec. 31, 2010, these estate tax reduction and deduction provisions were extended in 2010 under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, or “TRA 2010” with a new sunset provision set to expire on Dec. 31, 2012. Under EGTRRA and then TRA 2010, when wealthy taxpayers with large estates passed away, the decedents could pass on up to $5 million, indexed for inflation from 2011, of their estate free of tax. In addition, the maximum federal estate tax rate was 35%. If TRA 2010 were to expire without being replaced by a similar new tax provision, these amounts would revert back to their pre-EGTRRA levels. In order to enact new estate and gift tax provisions and prevent these provisions among others from expiring again, Congress passed ATRA.
So how does ATRA impact you and your estate planning strategies? Below are some important provisions under EGTRRA and TRA 2010 that have been encompassed in ATRA that may impact you.
Gift and Estate Tax Rates & Exemption Amounts. Under ATRA, the maximum estate, gift and GST tax rate is permanently set at 40% which occurs on amounts of taxable estate above $5,250,000. In addition, instead of setting the tax-exempted amount for decedents’ estates at EGTRRA’s limit of $1 million, ATRA permanently set the excluded amount at $5 million indexed for inflation from 2011. This amounts to $5.25 million exempt for gifts made from decedents’ estates for 2013.
Portability. Congress also permanently extended TRA 2010’s ‘portability’ provision, allowing spouses to transfer any unused estate tax applicable exclusion amount to the surviving spouse after one spouse passes away. This unused amount is called the ‘Deceased Spouse’s Unused Exemption’ or “DSUE”. Many taxpayers and planners may not have necessarily placed too much emphasis on the portability provision since it was subject to the two year sunset provision in TRA 2010, but now since this provision is permanent, portability could significantly change estate planning strategies for married couples.
Stepped Up Basis of Property Valuation. Before the enactment of EGTRRA, properties acquired from a decedent took an income tax basis, commonly referred to as the stepped up basis, equivalent to the fair market value of the property at the date of passing of the decedent. Although provision under EGTRRA adopted a carryover tax basis for 2010 only, ATRA allowed that provision to expire and permanently reinstated the stepped up basis of property valuation.
GST Tax Changes. Like estate and gift tax provisions, ATRA also made many EGTRRA GST tax provisions permanent, which can have a substantial impact in planning for the GST tax. Some of these include elections in and out of a deemed and retroactive allocation of GST exemption under Code Sec. 2632 amended by EGTRRA, as well as elections for qualified severance of a trust for GST tax purposes and rules concerning late GST elections.
Although on the surface it may not seem like ATRA will have a great impact since it only extends provisions already in place under EGTRRA and TRA 2010, the permanence of tax provisions in ATRA gives the tax bill a unique quality. It is because of its permanence that ATRA could substantially change estate planning strategies for the future and maybe even for the better. Stay tuned as we explore in depth specific tax provisions extended by ATRA and how best to plan around this new tax law.
One of the key provisions of ATRA is to make permanent the so-called portability of the applicable exclusion amount between spouses, which was enacted by Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
This post will begin a discussion of the portability rules, which greatly impacts estate planning.
The first issue regarding portability is what does portability do?
The answer is that portability allows the first spouse to die to transfer his/her unused estate tax applicable exclusion amount to the surviving spouse, who can then use it for his/her gift or estate tax purposes.
More specifically, if the estate of the first spouse to die makes the appropriate portability election, the surviving spouse’s applicable exclusion amount may be calculated as follows:
| + | Surviving spouse’s basic applicable exclusion amount. |
| + | Aggregate DSUE amount. |
| —- | ——————————– |
| = | Applicable exclusion amount |
Example. George and Barbara are married. George dies in 2011 and his estate makes the portability election. Assume the DSUE amount from George’s estate is $4 million. In 2013, when the basic applicable exclusion amount equals $5.25 million, Barbara dies. Here, the applicable exclusion amount available to Barbara’s estate equals $9.25 million, which is calculated as follows:
| + | $5,250,000 | Surviving spouse’s basic applicable exclusion amount. |
| + | $4,000,000 | Aggregate DSUE amount. |
| —- | ——————————– | |
| = | $9,250,000 | Applicable exclusion amount |
Any applicable exclusion amount of the first spouse to die that is used to reduce the estate tax liability of that spouse’s estate tax reduces the amount of the excess applicable exclusion amount that carries over to the surviving spouse in the form of the “deceased spousal unused exclusion amount” or DSUE amount.
In this regard, the DSUE equals the lesser of the following two items:
- The basic exclusion amount; or
- The excess of (a) the applicable exclusion amount of the last such deceased spouse, over (b) the amount with respect to which the tentative tax is determined under Code Sec. 2001(b)(1) on the estate of that deceased spouse.
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ATRA: An Unexpected Plus To Your Estate Planning -- )Lewis Saret, for Forbes
First, a little history on the enactment of ATRA. At the start of 2013, Congress and President Obama signed into law ATRA, which basically makes permanent many of the tax reduction or deduction provisions originally enacted in 2001 as part of the Economic Growth and Tax Relief Reconciliation Act or “EGTRRA”. This means ATRA has no built-in sunset provision and, pending other legislation, will not expire. Since EGTRRA included a sunset provision that set its expiration for Dec. 31, 2010, these estate tax reduction and deduction provisions were extended in 2010 under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, or “TRA 2010” with a new sunset provision set to expire on Dec. 31, 2012. Under EGTRRA and then TRA 2010, when wealthy taxpayers with large estates passed away, the decedents could pass on up to $5 million, indexed for inflation from 2011, of their estate free of tax. In addition, the maximum federal estate tax rate was 35%. If TRA 2010 were to expire without being replaced by a similar new tax provision, these amounts would revert back to their pre-EGTRRA levels. In order to enact new estate and gift tax provisions and prevent these provisions among others from expiring again, Congress passed ATRA.
So how does ATRA impact you and your estate planning strategies? Below are some important provisions under EGTRRA and TRA 2010 that have been encompassed in ATRA that may impact you.
Gift and Estate Tax Rates & Exemption Amounts. Under ATRA, the maximum estate, gift and GST tax rate is permanently set at 40% which occurs on amounts of taxable estate above $5,250,000. In addition, instead of setting the tax-exempted amount for decedents’ estates at EGTRRA’s limit of $1 million, ATRA permanently set the excluded amount at $5 million indexed for inflation from 2011. This amounts to $5.25 million exempt for gifts made from decedents’ estates for 2013.
Portability. Congress also permanently extended TRA 2010’s ‘portability’ provision, allowing spouses to transfer any unused estate tax applicable exclusion amount to the surviving spouse after one spouse passes away. This unused amount is called the ‘Deceased Spouse’s Unused Exemption’ or “DSUE”. Many taxpayers and planners may not have necessarily placed too much emphasis on the portability provision since it was subject to the two year sunset provision in TRA 2010, but now since this provision is permanent, portability could significantly change estate planning strategies for married couples.
Stepped Up Basis of Property Valuation. Before the enactment of EGTRRA, properties acquired from a decedent took an income tax basis, commonly referred to as the stepped up basis, equivalent to the fair market value of the property at the date of passing of the decedent. Although provision under EGTRRA adopted a carryover tax basis for 2010 only, ATRA allowed that provision to expire and permanently reinstated the stepped up basis of property valuation.
GST Tax Changes. Like estate and gift tax provisions, ATRA also made many EGTRRA GST tax provisions permanent, which can have a substantial impact in planning for the GST tax. Some of these include elections in and out of a deemed and retroactive allocation of GST exemption under Code Sec. 2632 amended by EGTRRA, as well as elections for qualified severance of a trust for GST tax purposes and rules concerning late GST elections.
Although on the surface it may not seem like ATRA will have a great impact since it only extends provisions already in place under EGTRRA and TRA 2010, the permanence of tax provisions in ATRA gives the tax bill a unique quality. It is because of its permanence that ATRA could substantially change estate planning strategies for the future and maybe even for the better. Stay tuned as we explore in depth specific tax provisions extended by ATRA and how best to plan around this new tax law.