DON’T OVERLOOK THE PORTABILITY OF A DECEASED SPOUSE’S UNUSED ESTATE TAX EXEMPTION

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Article Highlights

  • Estates may elect to transfer the unused estate tax exclusion to the surviving spouse.
  • Election must be made on an estate tax return for the decedent.
  • The estate tax return must be timely filed.

Estates of decedents who die after December 31, 2010 may elect to transfer any unused exclusion to the surviving spouse. The amount received by the surviving spouse is called the deceased spousal unused exclusion (DSUE) amount. Making this election can have a profound effect on the taxation of the estate of the surviving spouse.

Example: Bob and Jane are married and Bob passes away in 2012. Bob’s estate is valued at $3,700,000. Since Bob’s estate plan passed his entire estate to his wife Jane, the Federal estate tax would be zero due to the unlimited marital deduction afforded under the Internal Revenue Code. Since Bob’s estate did not utilize any of his federal estate tax exemption ($5,120,000 for individuals who died in 2012), the exemption is “wasted.” However, under the portability provisions of the federal estate tax, Bob’s estate can elect to pass that unused exemption to Jane by filing a Federal Form 706 and making the “Portability Election” on Bob’s estate tax return. If this “Portability Election” is made on Bob’s estate tax return, Bob’s unused estate tax exemption of $5,120,000 is transferred to Jane and increases her future estate tax exemption by this unused amount.

The highest marginal estate tax rate is currently 40%; therefore, the unused exemption passed from a decedent to his or her spouse via the “Portability Election” amount can result in significant estate tax savings.

Example: Suppose Jane in our prior example passes away in 2013. Assuming that Jane’s estate is valued at $6,000,000, if the “Portability Election” had not been made on Bob’s estate tax return, Jane’s taxable estate would be $750,000 ($6,000,000 less the $5,250,000 exemption for someone who dies in 2013). However, if the election had been made on Bob’s return, Jane’s taxable estate would be zero, as her total exclusion would be $10,370,000 (her $5,250,000 plus the portability from Bob’s estate of $5,120,000). Making this election would thus result in a sizable reduction in estate taxes.

A surviving spouse can apply the unused exclusion amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death.

Making the Election – To make the portability election, an estate tax return must be filed on time, even if the estate would not otherwise be required to file an estate tax return. Failure to file the estate tax return will result in the loss of the portability of the spouse’s unused exclusion amount. A timely filed return is one that is filed on or before the due date of the return, including extensions.

When a surviving spouse’s estate is expected to be valued at less than the estate tax exclusion amount when he or she passes, it may seem to be a waste of time and money to file a 706 Estate Tax Return for the pre-deceased spouse. However, in making that decision, one should consider the possibilities of the surviving spouse receiving inheritances or winning the lottery, or of Congress reducing the estate tax exemption at some time in the future. Any of these potential events could result in substantial estate tax considering the current tax rate on taxable estates is 40%.

If you believe that the election to transfer any unused exclusion to a surviving spouse applies to you, family members, or friends and would like additional information, please give this office a call.

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