Assume that you have a client that is a surviving spouse whose husband died after December 31, 2010 without a taxable estate and for which a Form 706 was filed resulting in the surviving spouse obtaining the decedent’s unused estate tax exemption (DSUE) amount of approximately $2,000,000. She has not made any gifts during her lifetime and she has a taxable estate of approximately $7,000,000 (she inherited money from her parents). On her death, there will be no estate tax because she has a total exemption amount of $7,430,000 ($5,430,000 (her estate tax exemption if she died in 2015) + $2,000,000). She would like to get remarried to a second husband who has an estate valued at or near the exemption amount. If her second husband predeceases her, she will lose the first husband’s exemption and obtain what little if any exemption amount her second husband had, resulting in a taxable estate of $7,000,000 with an exemption amount of $5,430,000 and a tax of $628,000 (40% of $1,570,000). The simple answer is that before she gets married, or as soon after as possible, she should gift $2,000,000 to an irrevocable trust for her children and file a gift tax return so she uses up the first husband’s DSUE amount before the death of her second husband. There are many permutations of this scenario, but this is the simplest method of preserving the DSUE amount from the first spouse.
What if a 706 was not filed? Can the surviving spouse still obtain the DSUE? The final regulations that came out in June 2015 provide that a 706 may still be able to be filed subject to the discretion of the IRS pursuant to Treasury Regulation Section 301.9100-3. In other words, the surviving spouse needs to obtain a private letter ruling (“PLR”) (for which the filing fee is $9,800 plus attorneys’ fees). If she is granted the ability to file a 706 by the IRS, she will save approximately $608,000 for her heirs if she outlives the second spouse (the amount of estate tax reduced by cost of PLR, attorneys’ fees and fees for filing a 706). The requirements for obtaining a PLR include that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. One of the reasons that the IRS accepts for a taxpayer acting reasonably and in good faith is that the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. Treas. Reg. Section 301.9100-3(b)(1)(v).
Please contact Robin Miskell in the firm’s Phoenix office at 602-889-5329 if you have any additional questions.