The Tax Relief Act of 2010 added a provision that allows a surviving spouse to use any unused estate tax exemption from his or her deceased spouse. So far, this is only available if both spouses die between January 1, 2011 and December 31, 2012. There is widespread optimism that portability will be extended by future legislation.
The IRS published regulations on June 15, 2012 dealing with numerous issues regarding the regulations. There are two noteworthy items that affect short-term planning.
First, if your spouse died on or after January 1, 2011, the rules for filing your spouse’s estate tax return have been relaxed under certain circumstances. If your spouse’s estate is not required to file an estate tax return because the value of the estate is below the filing threshold, you generally do not have to report values of assets passing to the surviving spouse or to charity. You only need to report the description, ownership, and/or beneficiary of the property together with sufficient information to establish your right to the marital or charitable deduction. This means that you are not required to obtain a full-blown appraisal of these assets. However, you must use “due diligence” to estimate the fair market value of the gross estate. You are allowed to identify a range of values with the Executor’s “best estimate” rounded to the nearest $250,000. This is welcome news because expensive appraisals can be avoided. You still have the issue of determining the fair market value of the assets for purposes of establishing the income tax basis of the asset and may choose to obtain appraisals anyway.
The other good news is that the regulations made it clear that gifts by the surviving spouse first use up the unused estate tax exemption from his/her spouse (“DSUE”). If your spouse died over the last eighteen months and left you some DSUE, you should consider making a gift prior to year-end. First, we don’t know that portability will be extended. Second, if you remarry and your next spouse dies before you have used your DSUE, you will lose the DSUE from your first spouse.