On Sept. 18, the IRS posted draft instructions to accompany draft Form 706, including guidance regarding the portability of the deceased spousal unused exclusion (DSUE) amount and a new Schedule PC, “Protective Claim for Refund.” (For details on Draft Form 706, see Joseph C. Mahon, “IRS Issues Draft Form 706,” http://wealthmanagement.com/estate-planning/irs-issues-draft-form-706.) The instructions to draft form 706 can be found at http://www.irs.gov/pub/irs-dft/i706--dft.pdf. The IRS also posted draft 2012 “United States Gift (and Generation-Skipping Transfer Tax Return” (Form 709), which can be found at http://www.irs.gov/pub/irs-dft/f709--dft.pdfHighlights of both drafts are detailed below.

 

Portability Instructions 

The new Part 6 of the draft Form 706 states that a decedent with a surviving spouse elects portability of the DSUE amount, if any, by completing and timely filing the Form 706.  No further action is required.  However, portability must be elected on a “timely filed” Form 706, which (regardless of the size of the estate) is a return filed within 9 months of death or, if an extension has been granted, the last day of the extension period.  There’s a box to check to opt out of portability.

 

The DSUE amount that can be transferred to a surviving spouse is calculated in Part 6, Section C.  DSUE amounts received from predeceased spouses are calculated in Part 6, Section D. The tax computation (line 9 of Part 2) now includes a computation to calculate the applicable exclusion amount and applicable credit amount (formerly the unified credit amount), factoring in any DSUE amount received from a predeceased spouse.  The applicable exclusion amount equals the total of: Line 9a, the basic exclusion amount ($5.12 million for 2012) and Line 9b, the DSUE.

 

Instructions Regarding Estimate of Value for Estates Not Otherwise Required to File

An estate tax return prepared in accordance with all applicable requirements is considered “complete and properly-prepared.”  However, estates that don’t otherwise have a filing requirement (that is, Form 706 is filed solely to elect portability) don’t have to report the value of certain property that qualifies for the marital or charitable deduction.  Only the description, owner and/or beneficiary and other information necessary to establish the right to the deduction need be reported.

 

To take advantage of this special rule, the executor must: 1) report the assets on the appropriate schedule, but without any value on the schedule itself; and 2) estimate in good faith and with due diligence the total value of the gross estate, using the following ranges of dollar values now provided in draft Form 706 instructions:

1.  If the total estimated value of the assets eligible for the special rule is less than or equal to $250,000, then report $250,000.

2.  If the total estimated value of the assets eligible for the special rule is more than $250,000, but less than or equal to $500,000, then report $500,000.

3.  If the total estimated value of the assets eligible for the special rule is more than $500,000, but less than or equal to $750,000, then report $750,000.

4. If the total estimated value of the assets eligible for the special rule is more than $750,000, but less than or equal to $1 million, then report $1 million.

 

Executors' estimates are subject to penalties for perjury.  There’s no guidance for estimated values of assets eligible for the special rule in excess of $1 million, although the temporary regulations issued by the IRS on June 15 referred to the executor's best estimate rounded to the nearest $250,000 (in advance of anticipated guidance in Form 706 instructions).  An executor can’t use the special rule under certain circumstances, including if a partial qualified terminable interest property election is made.  There’s also a box to check on the face of the return (Part 1, line 11) to alert the IRS if an executor is taking advantage of this special rule to estimate the value of the assets included in the gross estate.

 

Reminders

The draft instructions remind the reader that, although a spouse can use the DSUE amount from prior predeceased spouses in succession, a surviving spouse can’t use the sum of the DSUE amounts from multiple predeceased spouses at the same time or use the DSUE of a prior predeceased spouse after the death of a later spouse.  Also, if an executor is acting, only the executor (not a surviving spouse) can make or opt out of a portability election.

 

Protective Claim for Refund

The draft Form 706 also includes a new Schedule PC, to be filed to preserve the estate's right to claim a refund based on the amount of an unresolved claim or expense that may not become deductible under Internal Revenue Code Section 2053 until after the limitation period ends

 

Schedule PC must be filed with Form 706 and can’t be filed separately.  To file a protective claim for refund or notify IRS that a refund is being claimed in a form separate from the Form 706, the instructions provide that a Form 843, Claim for Refund and Request for Abatement must be used.  Each separate claim or expense requires a separate Schedule PC (or Form 843, if not filed with Form 706).  Schedule PC must be filed in duplicate for each separate claim or expense.

 

A note has been added to the top of Schedules J, K and L to advise that Schedule PC should be used to make a protective claim for refund due to an expense not currently deductible.  Expenses not currently deductible should also be reported on the appropriate Schedule J, K or L, but without a value.

 

Schedule PC Acknowledgement

The instructions provide that the first schedule PC to be filed is the initial notice of protective claim for refund, and the estate will receive a written acknowledgement of receipt from the IRS.  Certified mail receipt isn’t sufficient to confirm delivery of the claim, and if no acknowledgement is received from the IRS within 180 days, the fiduciary is advised to contact the IRS at 866-699-4083.

 

Ancillary Expenses

If a protective claim has been adequately identified, the IRS will presume that the claim includes certain expenses related to its resolution, including attorney and accounting fees. The estate isn’t required to separately identify or substantiate those expenses, but the expenses must meet IRC Section 2053 requirements to be deductible.

 

Notification of Claim Resolution

When the claim is finally determined, the estate should notify the IRS within 90 days of the date the claim is paid or the date on which the claim becomes certain, whichever is later.  The notification should provide facts and evidence substantiating the deduction and resulting re-computation of estate tax liability. 

 

There are two options with regard to notification:  1) file a supplemental Form 706 with an updated Schedule PC that contains the notation “Supplemental Information - Notification of Consideration of Section 2053 Protective Claim(s) for Refund.” The initial notice of claim should also be submitted; or 2) file an updated Form 843 containing the notation “Notification of Consideration of Section 2053 Protective Claim(s) for Refund.” The initial notice of claim must also be submitted.  Separate notifications must be submitted for every protective claim.

 

New Draft Form 709


There’s a new line in Part 1 (Line 19), which asks: “Have you applied a DSUE amount received from a predeceased spouse to a gift or gifts reported on this or a previous Form 709?”  If the answer is “yes,” there’s a box to check and a direction to complete new Schedule C (the DSUE amount).

The tax computation (line 7 of Part 2) now refers to the maximum applicable credit amount (formerly the unified credit amount), which factors in any DSUE amount from a predeceased spouse, computed on the new Schedule C.  Schedule C is for reporting the DSUE amount received from a last deceased spouse, as well as the DSUE received from other predeceased spouse(s) and used by the donor.

Although there are several references to “see instructions” on the draft form, the instructions have not yet been issued.

 

Act Now?

Using the DSUE during the lifetime of the surviving spouse may make good sense given:

  • If the surviving spouse remarries and the next spouse dies, any remaining DSUE of the first surviving spouse will be lost, even if the last deceased spouse has no or a smaller amount of DSUE than the prior spouse;
  • When the surviving spouse makes a gift, the DSUE of the last deceased spouse is applied before the surviving spouse's own exclusion amount;
  • A spouse who has had more than one predeceased spouse can use the DSUE of each surviving spouse in succession, as long as the DSUE of the last deceased spouse is used before any subsequent spouse dies.  There’s no recapture of previously gifted amounts in which the DSUE of a prior deceased spouse was used.  In fact, the surviving spouse can include in her applicable exclusion amount the DSUE amount of her most recently deceased spouse, even if she’s then married to another individual.  If the second marriage ends in divorce and the divorced spouse dies, the first predeceased spouse remains the last predeceased spouse for DSUE purposes. The divorced spouse isn’t considered the last predeceased spouse, because he wasn’t married to the surviving spouse at death; and
  • The last deceased spouse is identified as of the date of a taxable gift by the surviving spouse.  

 

This material is written by Lazard Wealth Management LLC for general informational purposes only and does not represent our legal advice as to any particular set of facts and does not convey legal, accounting, tax or other professional advice of any kind; nor does it represent any undertaking to keep recipients advised of all relevant legal and regulatory developments.  The application and impact of relevant laws will vary from jurisdiction to jurisdiction and should be based on information from professional advisors.  Information and opinions presented have been obtained or derived from sources believed by Lazard Wealth Management LLC to be reliable.  Lazard Wealth Management LLC makes no representation as to their accuracy or completeness.  All opinions expressed herein are as of the date of this presentation and are subject to change.