On July 31, 2015, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act (Act), which limits basis increase planning at the death of the surviving spouse. The importance of the Act requires a brief historical discussion.
Portability refers to the ability of a surviving spouse to use the first deceased spouse’s spousal unused exclusion amount (DSUEA).1 As an example, in 2015, assume the first deceased spouse had a taxable estate of $2 million that passed to a trust, and no qualified terminable interest property (QTIP) election was made. The applicable exclusion amount, the amount of the deceased spouse’s taxable estate not subject to estate tax is $5.43 million.2 The portability election operates as follows:
|First deceased spouse’s applicable exclusion amount||$5.43 million|
|First deceased spouse’s taxable estate||- ($2 million)|
This means that the surviving spouse has an applicable exclusion amount (AEA) of:
|$5.43 million (in 2015),
This should be a negative amount
|Exempt Amount||$8.86 million|
The primary issue involved is: Does a portability election under Internal Revenue Code Section 2010, combined with a QTIP election under IRC Section 2056(b)(7) allow a date-of-death basis at the death of the surviving spouse?
Planners have opined that such a combined election allows a date-of-death adjustment in basis on the death of the surviving spouse, based on a belief that the QTIP election causes the property to be included in the surviving spouse’s estate.
The belief that a QTIP election, combined with a portability election, would enable a date-of- death basis adjustment, failed to take into consideration Revenue Procedure 2001-38, holding that if a QTIP election isn’t needed to reduce estate taxes in the first deceased spouse’s estate, the QTIP election is a nullity for tax purposes.
Using our previous example, because the first decedent didn’t need a marital deduction, as the first spouse to die’s estate was under the $5.43 million, no QTIP election was needed to avoid estate taxes.
Treasury Decision 9725
Much was made about the fact that Rev. Proc. 2001-38 shouldn’t apply, and the tax community requested clarification. Treasury Decision 9725 (June 16, 2015) provided guidance:
8. Effect of Portability Election on Application of Rev. Proc. 2001-38
Rev. Proc. 2001-38, 2001-24 IRB 1335, when an estate makes a portability election under section 2010(c)(5)(A) as well as an election under section 2056(b)(7) to treat qualified terminable interest property (QTIP) as passing to the surviving spouse for purposes of the marital deduction. Rev. Proc. 2001-38 provides a procedure by which the IRS will disregard and treat as a nullity for Federal estate, gift, and generation-skipping transfer tax purposes a QTIP election made under section 2056(b)(7) in cases where the election was not necessary to reduce the estate tax liability to zero. The commenter notes that, with the introduction of portability of a deceased spouse's unused exclusion amount, an executor may purposefully elect both portability and QTIP treatment and the rationale for the rule voiding the election in Rev. Proc. 2001-38 (that the election was of no benefit to the taxpayer) is no longer applicable. The Treasury Department and the IRS intend to provide guidance, by publication in the Internal Revenue Bulletin, to clarify whether a QTIP election made under section 2056(b)(7) may be disregarded and treated as null and void when an executor has elected portability of the DSUE amount under section 2010(c)(5)(A). (Emphasis added)
The Act contains the actual statutory addition and includes an amendment to IRC Section 1014, dealing with the basis of property received from a decedent. It provides:
(Sec. 2004) Requires that: (1) the value of the basis in any property acquired from a decedent be consistent with the basis as determined for estate tax purposes; and (2) executors of estates disclose to the Internal Revenue Service and to persons acquiring any interest in the decedent’s estate information identifying the value of each interest received.
Which means that the value at the death of the first deceased spouse is to be used for all purposes, subject to planning steps available.
In summary, the use of an unnecessary QTIP election on the death of the first spouse to die doesn’t allow a date-of-death basis at the survivor’s death.
1. Notice 2011-82.
2. Revenue Procedure 2014-61.