Extension granted for proving that a surviving spouse has become a U.S. citizen.

Private Letter Ruling 201628011

Decedent’s surviving spouse was not a U.S. citizen, so to secure the marital deduction from the federal estate tax his will created a Qualified Domestic Trust (QDOT) for her lifetime benefit. Some time later, the surviving spouse became a U.S. citizen, but she didn’t mention this development to the QDOT trustee. Under §2056A(b)(12) and §20.2056A-10(a)(1) and (2) of the Estate Tax Regulations, a QDOT is no longer subject to the estate tax imposed under §2056A(b) if the surviving spouse becomes a citizen of the United States, and the spouse was a resident of the United States at all times after the death of the decedent and before becoming a United States citizen, and the U.S. trustee of the qualified domestic trust notifies the Internal Revenue Service and certifies in writing that the surviving spouse has become a United States citizen. Notice is to be made by filing a final Form 706-QDT on or before April 15 of the calendar year following the year that the surviving spouse becomes a citizen, unless an extension of time of up to six months for filing is granted under §6081. The trustee did not timely file the final Form 706-QDT.

Now that the Trustee knows, he has asked the IRS for an extension of time to file the Form. As granting the extension of time will not prejudice the interests of the government, the extension was granted.

(August 2016)

© 2016 M.A. Co. All rights reserved.

Portability election errors

The increase in the amount exempt from federal estate tax to $5 million per taxpayer (plus inflation adjustments) has been a game changer for estate planners. Nearly as important, when it comes to estate plans for married couples, is the advent of the portability of the estate tax exemption, the Deceased Spouse’s Unused Exemption (DSUE). By simply filing an estate tax return at the death of a spouse, even if no estate tax is due, the estate tax exemption for the surviving spouse may roughly double. Such a filing is not required, but it would be a good precaution to take. The future course of the family fortune as well as the federal transfer tax regime are difficult to predict, so any step that could save substantial tax dollars in the future should at least be considered.

But this is a brand new planning area with which we are becoming familiar. Lawyers Alan Gassman, Ed Morrow, Ken Crotty, Christopher Denicolo, Seaver Brown and Brandon Ketron have prepared “Ten Common Portability Mistakes and What You Need to Know to Avoid Them” as a guide [LISI Estate Planning Newsletter #2395 (February 29, 2016)]. Here are just four errors they highlighted to keep in mind.

Accidental election out of portability

Failure to file an estate tax return for the first spouse to die will forfeit the DSUE for the survivor. The estate tax return must be filed within nine months of death, but a six-month extension may be granted. Timely filing Form 4768 will gain an estate an automatic six-month extension.

Estates smaller than the statutory threshold for filing may apply for a discretionary extension of time even beyond the normal 15-month period. Many recent Private Letter Rulings have granted an additional 120 days for filing [see Private Letter Rulings 201610013 and 201608010, for example].

Given the relative newness of portability, we may expect many more such private rulings in the coming years. Eventually, more and more executors will recognize the need to file the estate tax return even when no taxes are owed.

Assuming that no estate tax planning will be needed

If total family wealth is about $5 million, a couple may assume that a single federal exemption amount will be sufficient to shield the family fortune from the federal estate tax. Thus, they might decide to forego planning for the portability election as not worth the expense of hiring a professional to file an otherwise unnecessary estate tax return.

There are two potential defects with this plan. First, the amount exempt from federal estate tax could be sharply reduced in the future—both of the Democratic candidates for President this year have endorsed
that idea.

Second, the surviving spouse may live for decades, and may not consume all of the income from that $5 million. If asset appreciation plus savings comes to just 7.2% annually, the family fortune will grow to $10 million in ten years, $20 million in 20 years. At a 10% growth rate, it could reach $40 million in 22 years. Inflation adjustments to the exempt amount are unlikely to keep up with that.

Losing the DSUE through remarriage

A surviving spouse may have a DSUE only from his or her most recently deceased spouse. Assume, for example, that widow with $8 million in assets has a $5 million DSUE through her late husband. She remarries a widower who has $10 million, and through a prenuptial agreement they waive their marital rights to each other’s assets. The second husband dies, leaving his entire estate to his descendants, using up his estate tax exemption. The widow’s DSUE from her first husband will be extinguished at that moment. Her heirs now may be exposed to substantial
estate taxes.

It is entirely possible that when she consulted her lawyers about the pre-nup, they might have recommended against the marriage at all, considering the tax consequences. The authors suggest consideration of a credit shelter or bypass trust to mitigate this potential problem.

Not maximizing the DSUE with an irrevocable life insurance trust

Assume that Husband and Wife have a $5 million joint estate, and they each have $2 million life insurance policies. At Husband’s death, his assets and the insurance proceeds pass into a credit shelter trust. That will use up $4.5 million of his exemption, leaving Wife a $950,000 DSUE. She has her own exemption amount, which will be inflation indexed, and the DSUE, which is not.

The better alternative may be to have the life insurance owned by an irrevocable life insurance trust. In that situation, the insurance proceeds may be excluded from Husband’s estate, leaving Wife a much larger DSUE.

Summing up

The advent of portability, coupled with larger exemptions, has allowed much greater flexibility in estate planning. However, that is not quite the same as simplicity. There remains a wealth of considerations for clients and their advisors to weigh as they find the best way forward in a challenging environment.

(April 2016)
© 2016 M.A. Co. All rights reserved.

Federal estate tax exemption


My estate is about $5 million—do I have to worry about federal estate taxes?



You are very close to the boundary for exposure to the federal estate tax. The exemption for 2016 has been increased to $5.45 million, which would seem to let you off the hook.  However, how accurate is your estimate of your estate?  Have you included the full value of your home and other real estate? Do you own interests in a closely held business that might be worth more than you realize? Do you own any fine art?  Values in some parts of the art market have boomed recently.  Getting a precise fix on the value of an estate is not an easy matter. What’s more, if your assets grow in value faster than inflation, you could easily find yourself in taxable territory.

On the other hand, are you married?  If so, to the extent that your property passes to your surviving spouse, federal estate taxation will be deferred until the survivor’s death, no matter how large your estate is when you die. What’s more, your surviving spouse may inherit any federal estate tax exemption that goes unused by your estate.  That means your spouse won’t have to worry about federal estate taxes unless the estate grows to over $10 million (plus accumulated inflation adjustments).

However, there is one more point to consider—state death taxes (estate taxes, inheritance taxes, or both).  Do you live in a state (or own property in a state) that has “uncoupled” from the federal estate tax regime?  A few states impose their death taxes on much smaller estates than does the federal government. If you live in one of these states, you should see an estate planner promptly to explore your options.

Garden State Trust Company