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Final Estate Tax Portability Rules Due by Year's End, Officials Say

By Diane Freda
Publication Date: 11/10/2011

Estate tax officials at the Treasury Department said Nov. 9 that they want to finalize proposed rules on portability by the end of the year, as they continue to field questions on what will constitute a timely filed Form 706.

In Notice 2011-82, IRS told executors of estates of people who died after 2010 that in order to claim the unused portion of a spouse's estate and gift tax exemption for 2011 they must file a complete and timely Form 706, United States Estate (and Generation Skipping Transfer) Tax Return.

However, the question has now become: When is a return due for an estate that is not required to file a return, said members on a Trust, Estate, and Gift Tax Technical Resource panel at the American Institute of Certified Public Accountants Fall Tax Division Meeting.

Portability allows married individuals to pass along the unused portion of their $5 million estate tax exclusion amount to a spouse to be used after their death.

Estates of less than $5 million in assets are not required to file the form for 2011 and 2012, but many will be doing so in order to claim portability, panel members said.

Competing Interests

Treasury officials are sympathetic to those who have missed the filing deadline, but said they are constrained by a statutory requirement of filing the form nine months after a decedent's death. Furthermore, they are trying to reconcile various interests.

“There is a lot of sentiment to try and not make life so difficult for those people,” Cathy Hughes, Treasury estate and gift tax attorney adviser told the panel.

“At the same time, there is a certain amount of information the service is going to need, and if people are getting a $5 million tax exclusion, it's going to require some work. How we balance that and try to find the line between those two competing positions is going to be a tough issue for us.”

The service definitely needs information about assets from the Form 706 in order to assign portability, but it does not necessarily need that information nine months after someone dies, argued Ellen Harrison, partner with Pillsbury Winthrop Shaw Pittman.

In fact, she said, it is not needed until the spouse claims portability, which can be many years later.

Harrison said IRS could come up with some presumptions that protect taxpayers who thought their estates were too small to require filing, while still safeguarding government interests.

IRS could put the burden on taxpayers to prove they are entitled to portability, she said.

Unreported Assets a Concern

Hughes suggested regulators will need the information from the Form 706 sooner rather than later, because records disappear, bank accounts are closed, and Form 1099s no longer exist years later.

“Fifteen years out, how is the service going to verify what the assets were?” she asked.

She also described a scenario where an estate's credit for the tax against the spouse's applicable exclusion amount might have been used up, but IRS would not know about it. A surviving spouse could try to claim the unused exemption 20 years later and the IRS would have no way to verify assets.

“What if there were 10 accounts that used up exemption?” she said. “How is the service going to find that out?”

At least if a return was timely filed there would be year-end tax statements and other ways IRS could pick up on that, Hughes said.

Transitional Relief

Gordon Spoor with Spoor & Associates in St. Petersburg, Fla., said there might be a case for providing transitional relief, since many people have been caught unaware by the new provision.

“You're asking people who have lost a long-term spouse within nine months after their death to get their arms around portability,” he said. “Some of them have been in grief therapy the entire time. The first year after death surviving spouses are not really good at making decisions.”

Wesley Scott, IRS estate and gift tax attorney adviser, told BNA that while IRS does not review every income tax return, it reviews every estate tax return because there are fewer of them, they are more subjective in terms of the executor having to determine the value of assets, and no discriminate information function (DIF) score is used for them.

The complete text of this article can be found in the BNA Daily Tax Report, November 10, 2011. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »

© 2011, The Bureau of National Affairs, Inc.