Portability

On December 17, 2010, President Barack Obama signed into law the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010, P.L. 111-312 (“TRA 2010”), which enacted a new system of portability of exclusion amounts for gift and estate tax purposes by amending Code Section 2010(c)(2) and adding new sections 2010(c)(3) through (6).  These provisions are available for the estates of those who die in the year 2011 and 2012.  Currently, these provisions are set to expire on December 31, 2012.

Congress did grant to the IRS the ability to create regulations to govern the administration of the Deceased Spouse's Unused Exclusion Amount ("DSUEA").  On June 15, 2012 the IRS issued new temporary and proposed regulations governing the application and filing of DSUEA.  Overall these regulations were very favorable for taxpayers and may open up new opportunities.  My gut instinct tells me that the IRS is thinking that DSUEA might be with us for the future given all the energy and effort put into these regulations which, in theory, would only be for a time frame of a little more than the next 6 months.

A timely filed Form 706 Estate Tax Return is still the vehicle to elect DSUEA.  Failure to file the return timely is an election not to preserve the decedent's DSUEA for the benefit of the surviving spouse.  Widows and widowers should consult tax counsel, even if the estate is not subject to the filing of a federal tax return, to consider whether one should file to preserve DSUEA in the years ahead.  Given the projected decrease in the basic exclusion amount for 2013 and the increase in the tax rate from 35% to 55%, the portability election may well become a bedrock of estate planning going forward.  Ultimately, Congress will have to tell us what the rules are going forward.  Stay tuned.

Here We Go Again....Proposed New Rules for IRA's.

On Tuesday, Senate Finance Committee Chairman Max Baucus announced he will release a modified Chairman's Mark of The Highway Investment, Job Creation and Economic Growth Act of 2012 ahead of the Committee's consideration of the bill. Under the proposal, the five-year rule is the general rule for all distributions after death for plans and IRA's (regardless of whether the owner dies before or after the required beginning date) unless the beneficiary is an eligible beneficiary as defined in the proposal. This would apply to deaths occurring after 2012. Eligible beneficiaries include any beneficiary who, as of the date of death, is the surviving spouse of the employee or IRA owner, is disabled, is a chronically ill individual, is an individual who is not more than 10 years younger than the employee or IRA owner, or is a child who has not reached the age of majority. For these beneficiaries, the exception to the five-year rule (for death before the required beginning date) applies whether or not the IRA owner or employee dies before or after the required beginning date. In addition, the five year rule would apply after the death of the beneficiary.

While this is only proposed legislation, it does show how some in Congress want to find new ways to increase our income taxes in the years to come.  Leaving money in an IRA (or any type of qualified plan, i.e. 401(k), 403(b), etc.) at death is the worst place to leave one's wealth for heirs to inherit anything.  That is why these vehicles are called "Retirement Plans".  One is to "use" these monies while one is alive during your retirement years to live on.  So many people make the mistake of only taking minimum distributions late in their retirement years allowing wealth to compound tax free.  But, never forget that this is only "tax deferral" and not "tax avoidance".  Every IRA guarantees that there will be at least two kind of taxes at death.  First, (i) an income tax; and (ii) secondly, an estate tax if one exceeds his or her basic exclusion amount.  People would be better leaving these assets to qualified charities when they see the tax brackets of what the IRS will take when people die. And, it is only continues to look worse with these kind of proposals.  Stay tuned.