Calculating Estate Tax Portability Exemption Amount: The Nuts and Bolts of DSUE Computations Planning Opportunities and Compliance Challenges in Reporting the Deceased Spouse Unused Exemption Amount WEDNESDAY, JANUARY 20, 2016, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code . You will have to write down • only the final verification code on the attestation form, which will be emailed to registered attendees. To earn full credit, you must remain connected for the entire program. • WHO TO CONTACT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Calculating Estate Tax Portability Exemption Amount January 20, 2016 Robert M. Maxwell, Esq. James Daneri, Esq. Glenmede Blanchard Krasner & French robert.maxwell@glenmede.com jdaneri@bkflaw.com
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Calculating Estate Tax Portability Exemption Amount: The Nuts and Bolts of DSUE Computations Presented by: James R. Daneri , J.D., LL.M. Taxation January 20, 2016 800 Silverado St, 2 nd Floor | La Jolla, CA 92037 | 858.551.2440 | jdaneri@bkflaw.com 5
Tax Planning “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” — Judge Learned Hand, Gregory v. Helvering , 69 F2d 809, 810 (2d Cir. 1934) . 6
Outline I. Portability – It’s Here to Stay II. Deceased Spousal Unused Exclusion Amount (“DSUEA”) III. DSUEA on IRS Form 706 Estate Tax Return Part 6 IV. DSUEA on IRS Form 709 Gift Tax Returns Schedule C V. Filing Form 706 Solely To Elect Portability VI. Planning Opportunities VII. Recent Developments in Estate Tax Reporting 7
I. Portability – It’s Here to Stay Overview: A. What is Portability? B. Legislative History C. Federal Estate Tax Basics D. Advantages of Portability E. Disadvantages of Portability 8
I. Portability – It’s Here to Stay A. What is Portability? The ability to transfer a deceased spouse’s unused gift/estate tax exclusion amount to his/her surviving spouse. B. Legislative History : Portability was introduced by Section 303(a) of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“TRUIRJCA”) . The American Taxpayer Relief Act of 2012 (“ATRA”) made portability permanent with the removal of the statute’s sunset provision. 9
I. Portability – It’s Here to Stay Federal Estate Tax Basics : “A tax is hereby imposed on the transfer of the taxable C. estate of every decedent who is a citizen or resident of the United States. ” (IRC § 2001(a)) Federal Estate Tax Rate – The Federal Estate Tax Rate is graduated with a maximum rate of 40% on taxable estates over $1,000,000. (IRC § 2001(c)) Basic Exclusion Amount – Each taxpayer has a $5,000,000 Basic Exclusion Amount from Federal Estate and Gift Tax, which is indexed for inflation adjustments for decedents dying after 2011. The Basic Exclusion Amount for decedents who died in 2015 is $5,430,000 and for decedents dying in 2016 is $5,450,000. (IRC § 2010(c)(3)) Applicable Exclusion Amount – The Applicable Exclusion Amount is the Basic Exclusion Amount plus any Deceased Spouse’s Unused Exclusion Amount (“DSUEA”) from a prior spouse. (IRC § 2010(c)(2)) Unified Federal Estate & Gift Tax Credit – The Applicable Exclusion Amount is unified with the Federal gift tax exclusion and is lowered by the value of taxable gifts made during the life of a decedent or a deceased spouse for which no gift tax was paid. Estate Tax Deductions – A decedent’s “taxable estate” is the gross estate including taxable gifts for which no gift tax was previously paid, net of the Estate Tax Marital Deduction, Charitable Deduction, and costs necessary to the administration of the decedent’s estate. (IRC §§ 2053, 2055, and 2056) 10
I. Portability – It’s Here to Stay D. Advantages of Portability : 1. Allows full advantage of Applicable Exclusion Amount Simplified Trust Administration – AB Trusts no longer necessary 2. Obviates need to segregate assets upon 1 st Spouse’s death 3. 4. Enables a Basis Adjustment on Second Spouse To Die 5. Potential Expansion of Applicable Exclusion Amount if multiple predeceased spouses 6. Possible Avoidance of State Transfer Taxation in Decoupled States 11
I. Portability – It’s Here to Stay E. Disadvantages of Portability : 1. Future growth still inside the estate 2. Requires filing of a Form 706 Estate Tax Return for a deceased spouse’s nontaxable estate 3. Unexpected state estate tax if survivor relocates 4. Planning issues for couples with children from prior marriage 5. Family discord with regard to making the election GST Exemption not portable 6. 12
II. Deceased Spousal Unused Exclusion Amount (“DSUEA”) Overview: A. DSUEA Calculation - IRC § 2010(4) B. DSUEA Example C. Election Required D. Gifts By Surviving Spouse E. “Last Deceased Spouse” F. Miscellaneous Special Rules 13
II. Deceased Spousal Unused Exclusion Amount (“DSUEA”) DSUEA Calculation - IRC § 2010(4): With respect to a surviving A. spouse of a deceased spouse dying after December 31, 2010, the term “deceased spousal unused exclusion amount” means the lesser of: 1. The Basic Exclusion amount in the year the deceased spouse died; OR 2. The Applicable Exclusion amount of the last such deceased spouse of such surviving spouse minus the sum of the deceased spouse’s taxable estate and the amount of adjusted taxable gifts of the deceased spouse for which no gift tax was paid. 14
II. Deceased Spousal Unused Exclusion Amount (“DSUEA”) B. DSUEA Example : Harry Husband made $3.5 million in gifts in 2002, when the applicable exclusion amount for gift tax purposes was $1 million. Harry paid gift tax on $2.5 million in gifts. In 2015, Harry died with a taxable estate of $3 million. Harry’s DSUEA is the lesser of: $5,430,000 (Basic Exclusion Amount at the time of Harry’s death) (1) OR (2) $5,430,000 (Basic Exclusion Amount) MINUS $4,000,000 ($1 million of adjusted taxable gifts + $3 million taxable estate) $1,430,000 • Harry’s DSUEA Amount is $1,430,000. • Note, for the purpose of this calculation only, Harry’s DSUEA calculation does not include taxable gifts for which gift tax has already been paid. 15
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