When a spouse passes away, their surviving partner often faces complex financial and legal challenges. One of the most important concerns is navigating the federal estate tax system, which can significantly impact the survivor’s financial future. In this article, we’ll discuss portability and the Deceased Spousal Unused Exemption (DSUE), which provides relief to the surviving spouse and helps them minimize their tax liabilities.
Portability is a provision in the United States tax code that allows the surviving spouse to inherit their deceased partner’s unused federal estate tax exemption. This means that the surviving spouse can add the deceased spouse’s unused exemption amount to their own, potentially reducing or even eliminating their estate tax liability. Portability was introduced in 2010 as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, and was made permanent by the American Taxpayer Relief Act of 2012.
Deceased Spousal Unused Exemption (DSUE)
The DSUE is the portion of a deceased spouse’s federal estate tax exemption that remains unused at the time of their death. For 2023, the federal estate tax exemption is $12.92 million, which means that if a person dies without using any of their exemption, the surviving spouse can potentially inherit the entire $12.92 million.
It’s important to note that the exemption amount is indexed for inflation and may increase over time. However, the exemption is also subject to political changes, as demonstrated by the Tax Cuts and Jobs Act of 2017, which temporarily doubled the exemption amount from 2018 to 2025. After 2025, the exemption amount is scheduled to revert to its pre-2018 level, adjusted for inflation.
How to Claim Portability and the DSUE
In order to take advantage of portability and the DSUE, the executor of the deceased spouse’s estate must file a timely and complete IRS Form 706 (United States Estate and Generation-Skipping Transfer Tax Return). This form must be filed within nine months of the date of death, although a six-month extension can be requested.
It’s crucial that the executor files Form 706 to elect portability, even if the deceased spouse’s estate isn’t required to file an estate tax return. Failing to do so will result in the forfeiture of the DSUE, potentially subjecting the surviving spouse’s estate to higher taxes.
Benefits of Portability and the DSUE
The most significant benefit of portability and the DSUE is the potential reduction or elimination of federal estate tax liability for the surviving spouse. This can provide significant financial relief, particularly for families with substantial assets. In addition, portability allows the surviving spouse to make lifetime gifts using the DSUE, which can be an effective estate planning tool.
Portability and the Deceased Spousal Unused Exemption are essential considerations for the surviving spouse of a deceased individual. By understanding these provisions and ensuring that the necessary tax forms are filed, the surviving spouse can maximize their estate tax exemptions, reduce their tax liabilities, and secure their financial future. It’s always advisable to consult with a qualified estate planning attorney or tax professional to ensure compliance and maximize the benefits of these provisions.
This article was written by chat.openai.com and was edited for accuracy by Daniel J. Rohr, CPA/PFS, EA, M.S. Tax.