Estates are exempt from taxes upon death up to a certain amount. For 2022, the exemption is $12,060,000. Estates valued under this amount don't have to pay estate taxes. What happens to the remaining amount of the exemption for those estates that are less than the exemption? Does it go unused? This is where the Deceased Spousal Unused Exclusion comes in.
How Deceased Spousal Unused Exclusion Works
After December 31, 2010, a deceased spouse's estate can transfer any unused federal state tax exemption for gift or estate taxes to the surviving spouse. This is called the Deceased Spousal Unused Exclusion (DSUE) or portability election.
The DSUE is meant to benefit the surviving spouse. Rather than the unused exemption being restricted from use, it can be transferred/ported to the surviving spouse. The exemption is available if the deceased spouse’s estate did not use all of the exemption.
To use the exclusion, an estate tax return (Form 706) must be filed within nine months after the decedent's date of death. On the return is a portability election. You actually have to check a box to elect out of it (Part 6, Section A). So by default, the portability election is available without selecting anything. An extension of up to six months can be filed using Form 4768. But it must be filed on or before the estate tax return due date.
It's crucial to file the estate tax return. Otherwise, the DSUE will be lost and potentially millions of dollars.
Before portability, if the spouse did not have a trust, the exemption was often lost. However, with DSUE, the deceased spouse exemption can be ported over to the surviving spouse.
If the exemption were $12MM, a married couple would have $24MM, even if no trust exists.
To see how the exemption works, let's say the deceased estate used up $7,060,000 of the exemption amount ($12,060,000 for 2022). This leaves $5,000,000 for the surviving spouse to add to their exemption amount. The surviving spouse also has an exemption of $12,060,000 for a total exemption of $17,060,000.
The estate exemption will continue to grow until 2026, when it expires. Most estates will not be taxable because they’ll be less than the exempt limit. The estate tax exemption is set to decrease on December 31, 2025. In 2026, the exemption will drop to $5 million (adjusted for inflation).
Working with an estate attorney can help ensure all estate rules are followed and that the DSUE, where applicable, is not lost.
