Most people know that a married couple has a life time exclusion amount that they can gift or bequest to heirs at death without paying a gift or estate tax or filing an estate tax return. The exemption amount in 2016 for a married couple is $10,900,000. However, if your joint assets are less than that and one spouse passes away, you may still want to file an estate tax return to elect portability.
Portability is a concept that is technically known as the “deceased spousal unused exclusion”, or DSUE. Portability allows the remaining spouse to utilize the unused estate tax exclusion of a deceased spouse at their own death, therefore getting an exclusion of more than their allotted amount ($5,450,000 in 2016 per individual).
For example, assume that a couple has a joint estate of $8,000,000. Each spouse owns $4,000,000 of the joint estate. The first to die is not required to file a tax return because their share of the estate is less than the $5,450,000 required to file an estate tax return. However, the surviving spouse will miss out on the deceased spouse’s unused exemption amount of $1,450,000 ($5,450,000 less $4,000,000) because the DSUE allocation is not automatic.
The only way to allocate the unused exemption to the surviving spouse is to file an estate tax return and make the election to apply the DSUE to the surviving spouse. By filing the estate tax return the remaining spouse now has a lifetime exemption of their own $5,450,000 plus the deceased spouse’s remaining $1,450,000 for a total of $6,900,000. Filing to preserve the DSUE can be a significant benefit, especially if the surviving spouse is in their 60s or younger and has many years to grow their assets and increase the size of their estate.
While it can take significant time to gather information for the preparation of an estate tax return, in reality, much of the information should be gathered anyway to provide the tax basis for all assets at date of death so it’s available for future asset sales. The estate tax return must be filed timely to make the portability (DSUE) election. An estate tax return is due nine months from the date of death and can be extended for an additional six months if necessary.
If you are a surviving spouse and find yourself in this position you should discuss the portability option with an LSL advisor. Please call us today at 714.569.1000.
Written by: Sherry Radmore, CPA
With over three decades in public accounting, Sherry’s area of expertise include individual and business taxation, estate gift and trust taxation, IRS and Franchise Tax Board representation, strategic growth strategies, tax planning, and wealth preservation. Sherry is responsible for our estate tax department as well, specializing in estate and trust planning and fiduciary accounting.
You can reach Sherry at 714-569-1000