Why is this Topic Important to Wealth Managers? This blogticle represents part three of five in a series on the unified estate and gift tax as well as the portability of the spousal credit. Most wealth managers are aware of the new changes to the federal estate and gift tax structure with the unification and increased exemption amount of five million dollars. This week we discuss the estate and gift tax in detail so that wealth managers are well prepared to address client planning needs.

The Marital Deduction

A 100-percent marital deduction generally is permitted for estate and gift tax purposes for the value of property transferred between spouses.[1] Transfers of ‘‘qualified terminable interest property’’ are eligible for the marital deduction. ‘‘Qualified terminable interest property’’ is property: (1) that passes from the decedent; (2) in which the surviving spouse has a ‘‘qualifying income interest for life’’[2]; and (3) to which an election applies. [3]

In other words, the marital deduction allows spouses to deduct unlimited amounts for property that passes from a decedent to his or her surviving spouse. [4]

Portability of the DSUEA

Fittingly, as Benjamin Franklin notes there are two certainties in life; death and taxes.[5] Eventually the surviving spouse too will die and a tax on the combined estate will be imposed. Nevertheless, the Tax Relief Act of 2010 introduces a new estate tax concept for 2011 and 2012—the deceased spouse unused exclusion amount (DSUEA). Essentially, the DSUEA allows a surviving spouse to utilize the unused exclusion amount of the first spouse to die.

Under the provision, any applicable exclusion amount that remains unused as of the death of a spouse who dies after December 31, 2010 (the ‘‘deceased spousal unused exclusion amount’’), generally is available for use by the surviving spouse, as an addition to such surviving spouse’s applicable exclusion amount.[6]

If a surviving spouse is predeceased by more than one spouse, the amount of unused exclusion that is available for use by such surviving spouse is limited to the lesser of $5 million or the unused exclusion of the last such deceased spouse. A surviving spouse may use the predeceased spousal carryover amount in addition to such surviving spouse’s own $5 million exclusion for taxable transfers made during life or at death.

A deceased spousal unused exclusion amount is available to a surviving spouse only if an election is made on a timely filed estate tax return (including extensions) of the predeceased spouse on which such amount is computed, regardless of whether the estate of the predeceased spouse otherwise is required to file an estate tax return.

The applicable exclusion amount is the sum of two components: the basic exclusion amount and the DSUEA. The basic exclusion amount for estates of decedents dying in 2011 and 2012 is $5 million. The second part of the equation, the DSUEA, is the amount of the first-to-die spouse’s exclusion amount that is not used by that spouse’s estate. Note that a surviving spouse’s DSUEA is equal to the unused exclusion amount of the surviving spouse’s last deceased spouse.

Tomorrow’s blogticle will continue our weeklong series on the gift and estate tax.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] IRC Secs. 2056 & 2523.

[2] A ‘qualifying income interest for life’’ exists if: (1) the surviving spouse is entitled to all the income from the property (payable annually or at more frequent intervals) or has the right to use the property during the spouse’s life; and (2) no person has the power to appoint any part of the property to any person other than the surviving spouse.

[3] See generally IRC Secs. 2056 & 2523.

[4] IRC Secs. 2056 & 2523.; AMAFX-AUS Main Library. The Federal Estate Tax.

[5] Benjamin Franklin. Letter to Jean Baptiste La Roy 1789. “But in this world nothing can said to be certain except death and taxes.’

[6] See generally IRC Sec 2010(c)(4).

Tags: accounting, Benjamin Franklin, Death, Inheritance tax, Marital deduction, Tax, United States, Widow

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