Rubin on Tax has noted that a recent Estate Planning article discusses a technique to gift DSUE using partnership interests. The summary begins as follows:
Tasty Freeze: Preferred Partnership Tax-Saving Recipe
AUTHOR(S): Michael N. Gooen and Tracy A. Snow
PUBLICATION: Estate Planning Journal – May 2015
ABSTRACT (Key Points & Discussions)
- Surviving spouse’s can obtain the use of the unused unified credit amounts of their predeceased spouse (DSUE) if a portability election is made. However, if the surviving spouse remarries, and their new spouse dies before them, then the DSUE from the first spouse is lost and the DSUE, if any, from the latest spouse to die applies instead. If this new spouse has a smaller DSUE than the first spouse that died, the surviving spouse’s estate ends up with a smaller available DSUE.
- To avoid this, surviving spouse’s will often want to make a gift to use up the DSUE of their first deceased spouse before they remarry. If the DSUE of that first deceased spouse is used by the surviving spouse during lifetime before the death of a new spouse, the surviving spouse does not lose the benefit of that first deceased spouse’s DSUE amount.
- However, often the surviving spouse is not comfortable gifting away significant assets for this purpose – he or she may need those assets for support or for a rainy day fund.
- The authors suggest that the surviving spouse capitalize a partnership with preferred and common interests, and then gift away the common interests. It is intended that the surviving spouse INTENTIONALLY triggers Section 2701, which results in the surviving spouse making a taxable gift that includes both the value of the transferred common interest, AND the preferred interest retained by the surviving spouse (which preferred interest has the lion’s share of the real value). The surviving spouse uses the DSUE amount to avoid gift tax on this transfer.