New York Bar Association Outlines Four DSUEA Issues

Catherine Huges, Attorney-Advisor in Treasury’s Office of Tax Legislative Counsel, recently spoke at A conference hosted by the American Institute of Certified Public Accountants. Hughes informed listeners that detailed guidelines by the TreasurY concerning Notices 2011-82, 2011-42, IRB 516 should be available by the end of the year.

The New York Bar Association outlined four issues in a letter to the Treasury that the Treasury should resolve in the regulations. All four issues addressed in the letter relate to the deceased spouse unused exclusion amount. The four issues are outlined below:

1. DSUEA allocated first for gifts. Assume that a husband passes away and a wife is the surviving spouse. The husband’s executor files Form 706 and the spouse receives the DSUEA. If the spouse makes substantial taxable gifts and files IRS Form 709, NYCBA suggests that the DSUEA should be used first. If a spouse made substantial gifts and used her basic exclusion, upon remarrying a person who predeceases her and leaves no remaining DSUEA, she would potentially lose the benefit of the DSUEA of the first deceased husband.

2. No gift or estate “clawback” rule. If a surviving spouse has a $5 million basic exclusion and a $2 million DSUEA, she could make gifts of that amount without any transfer tax. For example, assume the spouse with $7 million in combined basic exclusion and DSUEA transfers $6 million to heirs. If she later remarries a spouse who has otherwise used his exemption and he predeceases her, she loses the DSUEA and could potentially pay added estate tax at death. The regulations should provide that there is no “clawback” potential.

3. Uncooperative executor and no DSUEA election. In many second marriages, the executor of the deceased husband will be a child of the first marriage. The executor may be unwilling to expend funds necessary to prepare and file Form 706. If the executor is unwilling to file Form 706, there will be no election and the spouse will have no DSUEA. NYCBA suggests that a surviving spouse in this circumstance should have the option to file and make the DSUEA election.

4. Clarify statute of limitations. In Sec. 2010(c)(5)(B) the IRS is granted authority to examine the estate tax return of the deceased spouse. This examination is intended to permit the IRS to recalculate the DSUEA, and there is no statue of limitations on that action. NYCBA suggests that this provision should be limited to solely a recalculation of the DSUEA, and not a recalculation of any other transfer taxes that may be due from the estate of the decedent husband.

Marital Portability Regulations Promised, Crescendo, Nov. 13, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.