Estate and gift taxation in the United States may be on the brink of undergoing significant changes, and these changes may have a notable effect on the estate planning of individuals who have lost a spouse within the last five years. The Tax Cuts and Jobs Act (TCJA) passed in 2017, and under its provisions, the estate and gift tax exemption amount increased substantially—but temporarily. With these provisions set to sunset at the end of 2025, widowed individuals need to take proactive steps to secure their estate planning benefits, particularly through the Deceased Spousal Unused Exclusion Amount (DSUEA) election, also known as the “portability election.”
Portability And Federal Estate Tax Basics
The federal estate tax is imposed on the transfer of an individual’s estate upon their death. This tax applies to estates valued above a certain threshold, which, as of 2025, is set at $13.99 million per individual. Any value of the estate exceeding this threshold may be taxed at a 40% rate.
An individual’s estate may include various assets such as real estate, investments, and personal property. However, the federal estate tax is only applicable if the total value of the estate exceeds the exemption amount, which varies yearly. For married couples, an important aspect of the estate tax is the marital deduction, which allows the surviving spouse to inherit an unlimited amount from the deceased spouse without incurring estate tax liability. This means that the surviving spouse does not have to pay estate taxes on the assets received from the deceased spouse, regardless of their value. The surviving spouse may consider making a QTIP election to delay the payment of any estate tax owed until their own death.
However, what happens if the deceased spouse doesn’t use their full estate tax exclusion amount? This is where the portability election comes into play.
The Portability Election
The portability election is related to a tax provision under Internal Revenue Code Section 2010(c), which allows the surviving spouse to use any unused portion of the deceased spouse’s federal estate tax exclusion amount. In simple terms, it lets a surviving spouse carry over or “port over” the deceased spouse’s unused exemption, essentially giving the survivor an increased estate tax exemption.
For example, if the deceased spouse’s estate is valued at $8 million and their exclusion amount for the year of death is $13.99 million, then the unused portion of their exclusion is $5.99 million. The surviving spouse could elect to carry over that unused portion and apply it to their own estate in the future, effectively increasing their exemption.
Electing For Portability Before 2025
With the estate and gift tax exemption set to revert to lower levels after 2025 unless Congress extends the TCJA provisions, utilizing the DSUEA has become an appealing estate planning strategy. If the exemption amount is reduced, many estates that were previously exempt from estate taxes could suddenly face significant tax liabilities.
For individuals who have recently experienced the death of a spouse, it’s important to note that the time to make the portability election is limited—the election must be made within 5 years of the spouse’s death. If portability is not elected, the surviving spouse will lose the ability to use the deceased spouse’s unused exemption, which could result in substantial estate taxes when the surviving spouse passes away. Given the uncertainty surrounding future tax policy, it is prudent to act now to ensure that the surviving spouse’s estate is protected from potential tax burdens.
Eligibility For The Portability Election
To take advantage of the DSUEA, several eligibility requirements must be met:
- Marital Status: The surviving spouse must have been legally married to the deceased spouse at the time of death. The couple must not have divorced before the death of the first spouse.
- Filing A Timely Estate Tax Return: The deceased spouse’s estate must file a timely estate tax return, even if no estate taxes are due. The estate must file IRS Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) to officially record the estate’s value, exemptions, and deductions. This form must be filed within nine months of the date of death unless an extension is granted (however, as previously mentioned, the estate may make the election up to five years after the death of the spouse if the sole purpose of filing is to make the election).
- Election By The Surviving Spouse: The surviving spouse must elect to use the deceased spouse’s unused exclusion amount. This election is made by filing a Form 706 for the deceased spouse’s estate (if not already filed) and then electing the DSUEA on the surviving spouse’s own estate tax return when applicable.
The Mechanics Of The Portability Election
Once the surviving spouse elects to use the deceased spouse’s unused exclusion amount, they can add that amount to their own individual exclusion.
Portability allows the surviving spouse to transfer more wealth to their heirs without incurring estate taxes. This can be particularly beneficial when the surviving spouse’s estate grows over time, whether through income generation, asset appreciation, or additional assets from the surviving spouse’s personal estate.
Potential Limitations And Considerations Of Portability
While the DSUEA provides several benefits, there are important limitations and considerations:
- Costs Of Making The Election: In order to make the election, a Form 706 must be filed for the deceased spouse’s estate. Further, in order to start the statute of limitations (the time limit during which the IRS can challenge the return), appraisals must be included with the return. Thus, the surviving spouse will need to decide whether the cost of paying a CPA to prepare the return and a certified appraiser to value the assets justifies the benefit of maintaining the DSUEA. If the value of the surviving spouse’s remaining estate is not significant (and is not expected to increase in value throughout the remainder of the surviving spouse’s lifetime), the portability election may be an unnecessary expense.
- Expiration Of The DSUEA Amount: If the surviving spouse remarries and their new spouse dies, they cannot use the previous spouse’s DSUEA. Rather, the election of the most recently predeceased spouse is applied.
- Planning Complexity: The election process can be complex. Professional tax advice is recommended to ensure that the election is made properly.
Take Advantage Of Portability Before The TCJA Sunset
With the potential for estate tax exemptions to be cut significantly after 2025, individuals who have lost a spouse need to act now to take full advantage of the portability election. Although there is still time before the sunset of the TCJA provisions, the uncertainty surrounding future tax policy makes it all the more important for widowed individuals to consider the portability election before the opportunity expires. By filing the necessary paperwork and ensuring that their estate plans align with current tax laws, surviving spouses can protect their beneficiaries from unnecessary tax burdens in the future.
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