Ca. Tax Lawyer 2016, VOLUME 25, NUMBER 2

Problems Regarding Recently Enacted Provisions Relating to the Portability of a Deceased Spouse’s Unused (Unified Gift/Estate Tax) Exemption ("DSUE") and Proposed Solutions to Those Problems1

By Richard S. Kinyon & Robin L. Klomparens2


Portability, which was enacted under the American Taxpayer Relief Act of 2012, allows a deceased spouse’s unused unified gift and estate tax exemption ("DSUE") to be utilized by the surviving spouse. Portability can be extremely beneficial as it allows married couples to simplify their estate planning. Previously, the DSUE did not pass to the surviving spouse unless a credit shelter or bypass trust was utilized on the first death. Now, the DSUE can be utilized even where the first spouse passes property outright, free of trust, to a surviving spouse.

Of course, the concept was simpler than the subsequent technicalities and issues that have arisen. The first spouse’s unused generation-skipping transfer ("GST") exemption does not port to the surviving spouse. Therefore, when any generation-skipping transfer tax planning is utilized, portability is not an option. Additionally, the DSUE amount is not given an annual inflationary increase. The rules also limit the use of the DSUE amount to the DSUE of the last deceased spouse. If the surviving spouse makes any gifts, the DSUE amount is used before the surviving spouse’s lifetime exemption. Also, portability has made planning potentially more difficult for married couples and their legal advisers due to the income tax issues that surround the death of a first spouse or surviving spouse. If a bypass or credit shelter trust is utilized, there is no step-up in basis on the second death, unlike if property is transferred outright to the surviving spouse.

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