Portability: The Basics and Beyond
S. Andrew Pharies
After much debate, the American Taxpayer Relief Act (ATRA)1 was signed into law by President
Obama on January 2, 2013, putting an end to over a decade of uncertainty about estate tax rates and
exemptions. ATRA made permanent the temporary changes made by the Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 2010 (2010 Act),2 which had ushered in a new era
for estate planning by reunifying the unified credit for estate tax and gift tax at $5,000,000, providing
that the unified credit is to be adjusted for inflation in future years, and introducing the new concept
of portability.
I. THE BASICS OF PORTABILITY
Portability is perhaps the most important concept introduced in transfer tax law since the unlimited
marital deduction and will impact millions of Americans.3 In simple terms, portability means that if,
when the first spouse dies, the value of his or her taxable estate plus adjusted taxable gifts is less than
his or her federal exemption from estate taxes, the surviving spouse can take (or “port”) the unused
exemption amount and use it, in addition to the surviving spouse’s own exemption, to make lifetime or
testamentary gifts.
A. Applicable Exclusion Amount (AEA)
What is popularly known as the estate tax “exemption” is actually a credit against the estate
tax measured as the tentative tax determined under Internal Revenue Code (“IRC” 4) section
1
Pub.L. No. 112-240 (Jan. 2, 2013).
2
Pub.L. No. 111-312 (Dec. 17, 2010).
Of the approximately 2,728,000 people in the U.S. who had a net worth of $1,500,000 or higher in 2004, 86% of them had a
net worth of $5,000,000 or below. See The 2012 Statistical Abstract, U.S. Census Bureau, Table 718.
3
4
All references to “IRC” or the “Code” are to the Internal Revenue Code of 1986, as amended, unless stated otherwise.
S. Andrew Pharies is a partner with DLA Piper LLP (US) in its San Diego office where he is a member of the firm’s Trusts and Estates
Group and Global Private Client Group. Mr. Pharies is a Fellow of the American College of Trusts and Estates Counsel. He serves as
an Advisor to the Executive Committee of the Trusts and Estates Section of the State Bar of California where he has served as Chair
of the Section’s Income and Transfer Tax Subcommittee and currently serves as Editor-in-Chief of the California Trusts and Estates
Quarterly. He also serves as a member of the Advisory Board for the UCLA-CEB Estate Planning Institute. Mr. Pharies is a Certified
Specialist in Estate Planning, Trust and Probate Law; he is listed in Best Lawyers in America for Trusts and Estates; and he has been
repeatedly named a San Diego and Southern California Super Lawyer in Trusts and Estates. Mr. Pharies is a frequent speaker and
author on domestic and international trusts and estates topics.
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46 | ALI CLE Estate Planning Course Materials Journal April 2015
2001(c) if the amount with respect to which the tax was computed was equal to the applicable
exclusion amount (AEA). For years prior to 2011, the AEA was defined as a single dollar figure. For example, in 2009 the AEA was $3,500,000, and in 2010 the AEA was $5,000,000. As
a result of the 2010 Act, as made permanent by ATRA, for deaths occurring after December
31, 2010, an additional element has been added to the computation of the AEA. The AEA
for a surviving spouse is now defined as the sum of (i) the basic exclusion amount (BEA) and
(ii) the deceased spousal unused exclusion amount (DSUE Amount).5
1. Basic Exclusion Amount (BEA)
The BEA is a set dollar amount adjusted for inflation.6 For 2014, the BEA is $5,340,000,7
which represents the base BEA of $5,000,000 plus an inflation adjustment of $340,000.
Unlike the DSUE Amount, described below, the BEA is not a static number, but will
continue to adjust for inflation over time.8
2. Deceased Spousal Unused Exemption Amount (DSUE Amount)
At the heart of portability is the DSUE Amount. The DSUE Amount looks to the estate
tax attributes of a surviving spouse’s most recently deceased spouse, if that deceased
spouse died after December 31, 2010. In that case, the DSUE Amount of a deceased
spouse is the lesser of (A) the BEA in effect in the year of the deceased spouse’s death, or
(B) the excess of (i) the deceased spouse’s AEA, over (ii) the amount on which the tentative tax on the deceased spouse’s estate is determined.9
Example 1: Assume Husband dies in 2014 with a taxable estate of $2,000,000, all of
which is given to Child. Wife’s AEA in 2014 will be $8,680,000, consisting of her 2014
BEA of $5,340,000 plus a DSUE Amount of $3,340,000 (computed as her deceased
spouse’s BEA of $5,340,000 less the $2,000,000 given to Child). In 2015, her BEA will
increase for inflation, but the DSUE Amount component of her AEA will remain at
$3,340,000.
5
IRC section 2010(c)(2).
6
IRC section 2010(c)(3).
7
Rev. Proc. 2013-15, 2013-5 IRB 444 (Jan. 11, 2013), section 2.13.
8
IRC section 2010(c)(3)(B).
9
IRC section 2010(c)(4); Temp. Treas. Regs. section 20.2010-2T(c)(1).
Portability | 47
B. Portability Election Made by Filing Estate Tax Return
For estates of decedents dying in 2012 and later, the “executor”10 must complete and timely-file11
an estate tax return, Form 706 - United States Estate (and Generation-Skipping Transfer) Tax
Return, to elect portability of the DSUE Amount to the surviving spouse.12 Revised Form 706,
bearing a revision date of August 2013, includes a new Part 6 – Portability of Deceased Spousal
Unused Exclusion, which includes a computation of the DSUE Amount.13 This filing requirement
applies to all estates of decedents choosing to elect portability of the DSUE Amount, regardless
of the size of the estate. The timely filing of a Form 706 with DSUE Amount will be deemed a
“Portability Election” if there is a surviving spouse.14 The election is effective as of the decedent’s
date of death, so the surviving spouse may use the DSUE Amount for any transfer occurring after the decedent’s death without further action.15 Once the election to port the DSUE Amount is
made and the due date for filing the decedent’s estate tax return (including extensions) has passed,
the Portability Election is irrevocable.16
1. Relief Measure In Light of Windsor.
In light of the Supreme Court’s decision in U.S. v. Windsor,17 the IRS has issued Revenue
Procedure 2014-18 to allow a late Portability Election for U.S. citizen decedents who
died between December 31, 2010, and December 31, 2013, and who were not otherwise required to file a Form 706. To qualify for the late filing, a Form 706 must be filed
on or before December 31, 2014, and must state at the top “FILED PURSUANT TO
REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).” This relief measure does not extend the time period in which a claim for refund may be filed to
recover taxes paid before a Portability Election was made, even if the period ends before
December 31, 2014, and before the Form 706 electing portability is filed. A claim for
refund filed before the Form 706 will be considered a protective claim.
See the discussion at Section VII(B), below, for further information regarding who may qualify as the executor for purposes
of the Portability Election.
10
A timely-filed return is one that is filed on or before the due date of the return, including extensions. Temp. Treas. Regs.
section 20.2010-2T(a)(1).
11
12
Temp. Treas. Regs. section 20.2010-2T(a).
Temp. Treas. Regs. section 20.2010-2T(b). Prior to the revision of Form 706, effective for decedents dying in 2011, the IRS
provided guidance in IRS Notice 2011-82 that a calculation of the DSUE Amount was not required and that merely filing the
return was sufficient to make the election.
13
14
Temp. Treas. Regs. section 20.2010-2T(a)(2).
15
Temp. Treas. Regs. section 20.2010-3T(c).
16
Temp. Treas. Regs. section 20.2010-2T(a)(4).
17
570 U.S. 12 (2013).
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2. Special Rules If Estate Tax Return Not Otherwise Required
The requirement that a Form 706 be filed to port the DSUE Amount to the surviving
spouse creates an administrative burden and expense when a Form 706 is not otherwise
required because the deceased spouse’s gross estate is less than his or her AEA. The Temporary Regulations allow a modified filing procedure for estates in this situation.18 Executors of such estates are not required to report the value of property that qualifies for the
marital or charitable deduction.19 If an executor chooses to make use of this special rule
in filing an estate tax return, the value of those assets must be estimated to the nearest
$250,000 and included in the total value of the gross estate. The estimate must be based
on a determination made in good faith and with due diligence, but formal appraisals are
not required. 20
3. Opting Out of Portability
There are two ways to opt out of portability: (i) the executor filing the estate tax return
affirmatively opts out by checking the box in Section A in Part 6 of Form 706; or (ii) no
Form 706 is timely filed for the decedent’s estate.21
C. Extended Statute of Limitations
IRC section 2010(c)(5)(B) extends the statute of limitations for examining a Form 706 of a deceased spouse in order to make determinations with respect to the DSUE Amount. Since the
DSUE Amount can be computed only after considering all estate tax attributes of the deceased
spouse’s estate, the entire Form 706 of the deceased spouse will remain subject to examination for
an indefinite period of time if the Portability Election is made. However, while the IRS may adjust
the DSUE Amount in connection with any gift or transfer at death by the surviving spouse that
uses any DSUE Amount, the IRS may not assess additional tax on the deceased spouse’s estate
after the statute of limitations has run for the decedent’s return.22
18
Temp. Treas. Regs. section 20.2010-2T(a)(7)(ii).
Temp. Treas. Regs. section 20.2010-2T(a)(7)(ii)(A). Exceptions to this rule are set forth in Temp. Treas. Regs. sections 20.20102T(a)(7)(ii)(A)(1) through (4) and include assets: (1) the value of which affects the value of assets passing to other recipients; (2)
the value of which is needed to determine qualification under IRC section 2032, 2032A, 6166, or any other provision of the
Code; (3) in which only a partial interest is included in the gross estate; and (4) that are the subject to a partial disclaimer or a
partial QTIP election.
19
20
Temp. Treas. Regs. section 20.2010-2T(a)(7)(ii)(B).
21
Temp. Treas. Regs. section 20.2010-2T(a)(3).
22
Temp. Treas. Regs. section 20.2010-3T(d).