Background and History
Estate taxes limit the amount of wealth that can be passed on tax-free at the federal level through a set exemption amount. For married couples, the “marital deduction” has long allowed assets to transfer between spouses without immediate estate tax. However, before 2011, any unused exemption from the first spouse who died was lost.
The introduction of the portability rule by the IRS in 2011 changed this by allowing the unused estate tax exemption of the first spouse to pass away to transfer to the surviving spouse. This transfer is known as the Deceased Spousal Unused Exclusion (DSUE). Portability makes estate tax planning more efficient by effectively doubling the amount that a surviving spouse can shield from federal estate taxes.
How DSUE Works
For example, suppose the federal estate tax exemption is $12.92 million (for 2023, with slight adjustments expected for inflation in 2025). If one spouse dies owning $6 million, none of this may be subject to estate tax because it falls under their exemption. The unused exemption — in this case, $6.92 million — becomes the DSUE that the surviving spouse can carry forward.
When the surviving spouse dies, they can combine their own exemption with the DSUE to protect a larger estate from federal estate taxes. Essentially, this provides a “double exemption” shield to married couples.
Real-World Example
Consider John and Mary, with the federal estate tax exemption at $12.92 million. John passes away owning $7 million, so he uses $7 million of his exemption but leaves $5.92 million unused.
Mary, the surviving spouse, inherits this $5.92 million DSUE and adds it to her own $12.92 million exemption. Thus, Mary has nearly $18.84 million of federal estate tax exemption to shelter her estate.
Eligibility for DSUE
To claim DSUE, specific requirements must be met:
- The couple must be legally married at the time of the first spouse’s death.
- The deceased spouse must have been a U.S. citizen or resident.
- The executor must file IRS Form 706 within nine months after death (with a possible six-month extension).
- The deceased’s estate must elect portability on Form 706, even if no estate tax is owed.
- The surviving spouse must be a U.S. citizen or resident.
Failure to timely file Form 706 usually results in losing the DSUE benefit.
Strategies for Using DSUE
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File Timely Form 706: It is critical to file Form 706 promptly to elect portability and preserve DSUE. Late filing may be allowed only through a private letter ruling from the IRS.
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Keep Documentation Safe: The DSUE amount is documented in a DSUE statement attached to Form 706 and must be preserved for future estate and gift tax returns.
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Update Estate Plans: After inheriting DSUE, it’s wise to review estate plans to utilize the increased exemption strategically.
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Consider Remarriage Implications: If the surviving spouse remarries, the original DSUE cannot be transferred again from the new spouse.
Common Misconceptions
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DSUE is automatic: The tax benefit requires filing Form 706 electing portability; it does not apply automatically.
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DSUE applies only to estate taxes: The DSUE cannot be used to offset gift or income taxes; it solely applies to federal estate taxes upon the surviving spouse’s death.
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DSUE lasts indefinitely: The DSUE expires when the surviving spouse dies if unused; it cannot be passed down further.
Frequently Asked Questions
Q: Can DSUE amounts be split between spouses?
A: No. DSUE is the unused exemption of the deceased spouse and transfers entirely to the surviving spouse.
Q: What if the surviving spouse remarries?
A: DSUE from a deceased spouse applies only to that spouse. It cannot be transferred or reused after remarriage.
Q: Does state estate tax recognize DSUE?
A: DSUE is a federal provision. Many states have independent estate or inheritance taxes and do not acknowledge DSUE, requiring separate state-level estate planning.
Summary Table
| Aspect | Details |
|---|---|
| Definition | Unused federal estate tax exemption from deceased spouse |
| Beneficiary | Surviving spouse |
| Required Action | File IRS Form 706 within 9 months of death |
| Benefit | Adds to surviving spouse’s estate tax exemption |
| Applicable Taxes | Federal estate tax only |
| Expiration | Ends with surviving spouse’s death |
| Portability Rule | Yes, DSUE is the portability amount |
Related Resources
For further information on related topics, visit FinHelp.io’s articles on Portability of the Estate Tax Exemption and Estate Tax Planning.
Authoritative External Link
- IRS Estate Tax FAQs: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax-faqs
Sources
- IRS, Estate Tax FAQs
- Investopedia, Estate Tax Overview
- Kiplinger, Estate Planning Tips
Understanding and properly utilizing DSUE can significantly reduce federal estate taxes for surviving spouses, maximizing the value passed to heirs.