In a recent case that is a cautionary tale to preparers of federal estate tax returns, the Tax Court held that the IRS was permitted to examine the estate tax return of the first spouse to die in determining the deceased spousal unused exclusion amount (DSUE) available to the estate of the surviving spouse.  The result was an increase to the federal estate tax in the estate of the second spouse.

A husband died in 2012 and his estate reported his DSUE on form 706, the federal estate tax return, and elected portability of the DSUE to the surviving spouse.  The IRS sent the husband’s estate a federal estate tax closing letter reporting the return was accepted as filed.  When the wife died in 2013, her estate claimed the DSUE reported by the husband’s estate.  As part of the examination of the wife’s federal estate tax return, the IRS also examined the 706 filed by the husband’s estate.  Without determining a deficiency against the husband’s estate, the IRS reduced the amount of the husband’s DSUE by the amount of taxable gifts given by husband during his life.  This reduction in the DSUE reduced the total exclusion available in the wife’s estate and resulted in an increase of the estate tax.

Several holdings by the court are noteworthy:

In June of this year, the IRS published a revenue procedure that allows certain estates to make a late portability election if a timely election was not made. Rev. Proc. 2017-34. The portability election allows a decedent’s unused basic exclusion amount (known as the deceased spousal exclusion amount, or DSUE) to be transferred to the surviving spouse for his or her use during life or at death. In effect, this allows married couples to double the amount of assets they can shelter from federal estate and gift taxes.

In order to make a portability election, the personal representative of the estate of the first spouse to die must file a timely (including extensions) federal estate tax return (Form 706) following the death of the first spouse, even if the estate of the first spouse to die is not otherwise required to file Form 706. For example, if a decedent’s assets and lifetime adjusted taxable gifts do not exceed a certain amount (in 2017 the amount is $5.49 million), a 706 is not required. Many taxpayers, not knowing the rules and not otherwise required to file Form 706, fail to make the portability election timely.

In January of 2014 the IRS had issued Rev. Proc. 2014-18, which provided an automatic extension for certain estates of decedents dying after December 31, 2010 and on or before December 31, 2013 to elect portability of the DSUE by filing Form 706. However, after December 31, 2013, the only way to make a late portability election was to seek a private letter ruling from the IRS pursuant to Treasury Regulations. Despite the fact that private letter rulings can be time-consuming and expensive, the Service has issued many such rulings in the last few years by estates seeking to make a late portability election. Hence the new revenue procedure provides a welcome and lest costly method for preserving the DSUE.

We live in a digital age. The advent of the personal computer, the rise of social media, online access to financial accounts and commerce, and the development of increasingly efficient programs and applications affording easy access to our finances, shopping, entertainment activities, and communications, have helped to create a world in which each of us likely spends a portion of most days online. The result is often a trove of digital assets that we have created, communicated, and stored. Some of these assets may have substantial inherent financial value (for example, frequent flyer miles and other award programs), some may have value because they are the means of accessing other assets (e.g., your bank account user name and password), and some may have sentimental value (such as your e-mail account holding personal correspondence).

Digital assets can present a challenge for fiduciaries. Items that 30 years ago would have had a physical existence, such as bank account statements, may now only exist in the digital realm. Because digital assets are intangible, identifying them and gaining access to them on behalf of their owners can be time-consuming and often, because this is a relatively new asset class and the rules governing it are still evolving, unsuccessful. Through planning, it is possible for individuals to take steps to protect what matters in their digital lives.

Most service providers include their policies regarding deceased users’ accounts in the terms of service provided when a user establishes the account, including what happens when the account owner dies. However, few people in practice pay attention to the provisions to which they are agreeing. It is sometimes the case that a service provider’s terms of service will cause all access to terminate as a result of an account owner’s death. Service providers are beginning to address the probability that many users would want someone to have access to the content the user has created or stored. For example, Google has an “Inactive Account Manager” function that allows users to determine what happens to the digital assets stored on Google sites after a period of inactivity. The user can request that Google either notify a specified individual and share information with that person, or can request that Google delete an account and its contents.