The Benefits of the Deceased Spousal Unused Exemption
This article pertains to one of the lesser known benefits of the new estate tax law, the Deceased Spousal Unused Exemption or DSUE. My goal in writing this article is to emphasize the importance of filing an estate tax return even when a deceased spouse’s taxable estate is less than the basic exclusion amount, $5.25 million for 2013, in order to benefit a surviving spouse (but only when the surviving spouse’s estate is estimated to be at least $2 million). The examples in this article are based on the presumptions that we are referring to married couples (one of whom has died or will die) who have made no taxable lifetime gifts. The calculations and formulas in the examples would be somewhat more complicated to explain if we also accounted for the taxable lifetime gifts and any gift taxes paid on those gifts while attempting to explain the general concept of the Deceased Spousal Unused Exclusion (DSUE) and its importance.
I feel sure that many readers have begun looking at this article and started to wonder what is this DSUE and how does it apply to me. In order to answer these questions, we have to start with certain fundamental premises of which many readers are already aware. When someone dies, the assets they leave behind are called an estate.
If the assets are left to people or entities who are not a deceased person’s surviving spouse or a charitable-
I believe that many people think that if they die with under $5 million dollars in taxable assets then their estate does not have to even worry about filing an estate tax return – thinking: “[T]here’s no problem” and “[T]hat’s one less thing to worry about.” The truth out of such thinking is that while it is true that your estate would not have to file an estate tax return if your taxable estate is $5.25 million dollars or less (the current basic exclusion amount) (there is no law stating that you have to file), your estate could be foregoing the addition of an extra amount of estate tax exemption to your surviving spouse’s basic exclusion amount thereby increasing your surviving spouse’s total estate tax exemption amount, possibly reducing the amount that is subject to estate tax and possibly increasing the amount that goes to distributees depending on the basic exclusion amount and value of the surviving spouse’s estate at surviving spouse’s death. In 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 created (and the American Taxpayer Relief Act of 2012 re-
To me, this portability concept is a concept best pictured while attempting to understand it. In this first foundational example, I am going to use acres instead of money (5.25 acres instead of $5.25 million [the current basic exclusion amount]) and a bank instead of a taxable estate. First, let us assume that husband and wife each own 5.25 acres of land (10.5 acres combined) and husband has a bank mortgage on his 5.25 acres worth exactly 2.5 of his acres upon which the bank can take the 2.5 acres instead of money.
Next, the husband dies, the bank takes it s 2.5 acres of land and the remaining land, 2.75 acres (the husband’s original 5.25 acres -
Now, let us tie the example above more into the new estate tax law while using money instead of acres. In the second example, husband and wife each have a $5.25 million basic amount exclusion (as does everyone for 2013). Husband dies with a $2.5 million estate subject to estate taxes.
Because $2.5 million is less than the $5.25 million basic exclusion amount, no estate taxes are actually due. Also, because the PR for the husband’s estate filed an estate tax return (or made the portability election of the DSUE), the husband’s estate was able to transfer the $2.75 million of his unused basic exclusion amount ($5.25 million -
The Internal Revenue Service does not just automatically give a surviving spouse the deceased spouse’s leftover exemption. The PR for the deceased spouse has to proactively file the estate tax return in order to bump up the estate tax exemption amount for the surviving spouse. The policy for allowing the transferability of the leftover (unused) estate tax exemption is to allow for a total $10.5 million estate tax exemption between two spouses.
Furthermore, if one spouse has an estate less than $5.25 million (or the basic exclusion amount at the time), the Service requires that the PR prove the value of such estate in order for the surviving spouse to claim the benefit of the unused estate tax exemp tion of the deceased spouse (the difference between one’s basic exclusion amount and one’s estate value) by filing an estate tax return. The return allows the Service to have and review a record of the first deceased’s spouse’s estate value – basically, the deceased spouse’s exemption that was actually used by the deceased spouse. Once a deceased spouse’s estate value is determined (the deceased spousal used exemption), the surviving spouse’s estate or the Service can determine the deceased spousal unused exemption by subtracting the deceased spouse’s estate value from the basic exclusion amount effective during the decedent’s year of death.
Prior to 2011, if a deceased spouse’s estate had less than the basic exclusion amount, there was no opportunity for portability of the unused basic exclusion amount to the surviving spouse 3 and the deceased spouse’s unused exemption provided no benefit to the surviving spouse. The federal government has changed this rule in order to benefit the taxpayer under this type of circumstance by adding the concept of portability of the DSUE to the tax code. It will be important for the PR of the deceased spouse to consider filing the estate tax return if the PR has any indication that the surviving spouse’s future est ate (including all that such surviving spouse inherits from the first spouse to die and others) will be taxable.
For me, the estimated monetary threshold amount of the surviving spouse’s estate for a PR to use in considering whether to make the port ability election for the first spouse to die is $2 million dollars. If a surviving spouse’s estate is expected to be $2 million or more, I would suggest that the PR of the first spouse to die file the estate tax return to transfer the deceased spousal unused exemption to the surviving spouse. This $2 million amount is what I consider to be my conservative opinion as of 2013. My opinion could change over time.
Again, the current basic exclusion amount is $5.25 million. Last year, the amount was $5.12 million, and if the estate laws had not been basically re-
The bottom line is that the basic exclusion amount can be raised or lowered by Congress. I do not believe the basic exclusion amount is going to be lowered by Congress below $2 million anytime in the near future. Thus, in my opinion, PRs of deceased spouses should not worry about filing estate tax returns (in order to benefit the surviving spouse with the transferred unused exemption) if the future estate of the surviving spouse is estimated to be less than $2 million. If the estate of the surviving spouse is estimated to be $2 million dollars or more, the PR of the deceased spouse should file an estate tax return and transfer the unused exemption to the surviving spouse thereby increasing the surviving spouse’s total exemption (basic exclusion amount + DSUE).
For example, suppose in 2013 a deceased wife’s estate transferred a $3.25 million DSUE ($5.25 million basic exclusion amount -
In conclusion, even though a deceased spouse might not have an estate valued over the basic exclusion amount, it does not mean the personal representative of the deceased spouse should automatically forego making a portability electio n of the deceased spousal unused exclusion. Such election could greatly benefit the surviving spouse’s estate by reducing or eliminating estate taxes. If the surviving spouse is expected to have an estate of at least $2 million, the personal representative of the deceased spouse should consider electing portability thereby transferring the Deceased Spousal Unused Exemption to the surviving spouse.
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