You may be aware that under current law, a surviving spouse can
“inherit” the unused estate tax basic exclusion (the “deceased spousal
unused exclusion” or “DSUE”) of his or her deceased spouse. The ability
to transfer the DSUE to a surviving spouse is referred to as
“portability”.

The basic exclusion is $11,400,000 for decedent’s dying in 2019, and
is currently adjusted for inflation. Many of our clients initially
don’t see the benefit of claiming the DSUE when their current estates
are relatively modest. However, that doesn’t take into consideration
that an estate make increase suddenly due to inheritance from another
person, significant damage awards, lowering of the basic exclusion
amount by Congress, or other unanticipated changes in the estate and
gift tax laws.

The DSUE is added to the surviving spouse’s own unused basic exclusion
to make up the “applicable exclusion” which can be applied to taxable
transfers made by the survivor, either during lifetime or at death.
No special provisions are required in the Will of the first to die in
order to allow the DSUE to pass to the survivor, and claiming the
DSUE does not change the provisions of the estate plan of the first
spouse to die during the survivor’s remaining lifetime. Finally, and
generally, at the survivor’s death, most assets includible in the
survivor’s estate, including any assets inherited from the first
spouse, receive a step-up in income tax basis.

It is important to note, however, that portability is not automatic.
In order for a surviving spouse to use the DSUE, an election must be
made by the personal representative of the deceased spouse’s estate
by filing a timely filed estate tax return (Form 706) for the
deceased spouse’s estate. This is so even though a return otherwise
would not be required, because the deceased spouse’s gross estate is
less than the estate tax exclusion for the year of death.

In fact, it would seem that every personal representative will now
have to carefully consider whether to file an estate tax return for
the estate of every first spouse to die where the estate and gift
tax exclusion was underutilized so as to preserve the remaining
exclusion for the use by the surviving spouse. We refer to these
returns as “DSUE 706s”. Other than the cost of preparing and filing a
DSUE 706, there does not appear to be a down-side to making such a
filing. Failing to advise a client of the opportunity to file a
DSUE 706 could be considered professional negligence. Like most
returns filed with the government, there is a time deadline for filing.

In addition to preparing Form 706s for estates required to file, we
also prepare DSUE 706s. Considering that the current estate tax rate
for taxable estates is 40%, filing a DSUE 706 seems like a simple
decision to protect the estate of the surviving spouse and his or her
heirs.

If you would like more information on this topic, please call our
office at (843)692-7755.