Widowed individuals, acting swiftly, can secure significant tax benefits through strategic estate planning amid changing legislation.
Portability and Federal Estate Tax Basics
Understanding the federal estate tax is crucial for widowed individuals navigating their financial future. The estate tax applies to the transfer of an individual’s estate upon their death and is conditioned by values exceeding a specific threshold. As of 2025, this threshold is projected to be $13.99 million per individual, with any amount above subject to a staggering 40% tax rate.
The estate's value comprises various assets such as real estate, investments, and personal belongings. Fortunately, there's a key provision that allows for strategic planning: the marital deduction. This provision enables a surviving spouse to inherit unlimited assets from the deceased spouse tax-free. However, what if the deceased spouse didn’t fully utilize their estate tax exclusion amount? This is where the Deceased Spousal Unused Exclusion Amount (DSUEA) comes into play.
Understanding the Portability Election
The portability election, outlined under Internal Revenue Code Section 2010(c), permits the surviving spouse to use any unused portion of the deceased spouse’s federal estate tax exclusion. This effectively boosts the survivor’s estate tax exemption, providing a safety net against future tax liabilities.
For instance, if your deceased spouse's estate is valued at $8 million while their exclusion amount at death is $13.99 million, the unused exclusion stands at $5.99 million. By making the portability election, the surviving spouse can carry over this unused amount for their estate, increasing the exempt amount from estate taxes.
Importance of Acting Before 2025
With the looming sunset of the Tax Cuts and Jobs Act, the landscape of estate and gift taxation is likely to change. The exemption amount could revert to lower thresholds if Congress does not extend these provisions, potentially resulting in substantial tax liabilities for many estates. It’s an urgent matter for individuals who experienced spousal loss in recent years. Electing portability within five years of the spouse’s death is critical, as failing to do so forfeits the right to use the deceased spouse’s unused exemption.
Eligibility Requirements for the Portability Election
Several key criteria must be met to successfully claim the Deceased Spousal Unused Exclusion Amount
- Marital Status: The surviving spouse must have been legally married to the deceased spouse at the time of death. There can be no prior divorce.
- Filing a Timely Estate Tax Return: Even if estate taxes are not owed, a timely IRS Form 706 must be filed for the deceased's estate. This form officially documents the estate’s value and exemptions and must be submitted within nine months after death.
- Election by the Surviving Spouse: The surviving spouse must choose to utilize the deceased spouse’s unused exclusion amount by filing the appropriate forms.
How the Portability Election Works
Once successfully elected, the surviving spouse can combine the unused exclusion amount with their own. This means allowing a larger estate to pass to heirs without incurring estate taxes. This is especially useful as the survivor’s estate may grow through appreciation or accumulation of income over time.
Important Considerations and Limitations
While the DSUEA offers significant advantages, widowed individuals should be aware of potential challenges
- Costs of Filing: The Form 706 must be filed with appraisals, which can require hiring a CPA or certified appraiser. Evaluate whether these costs are justifiable based on your estate’s value and potential growth.
- Expiration of DSUEA Amount: If the surviving spouse remarries and the new spouse passes away, the original DSUEA cannot be claimed. Only the election from the recently deceased spouse applies.
- Complexity of the Election Process: Navigating the intricacies of making this election is not simple. Professional guidance can ensure everything is handled correctly.
Final Thoughts: Take Action Now
With the imminent risk of a reduced estate tax exemption following the expiration of the TCJA, widowed individuals should prioritize executing their estate plans. Ensuring timely filings and effective strategies aligned with current tax laws is vital in protecting beneficiaries from potentially overwhelming tax burdens.
Engaging with professionals who specialize in estate planning can facilitate a smoother navigation through the complexities of the portability election and help claim the Deceased Spousal Unused Exclusion Amount effectively. Protect your financial legacy today to avoid complicating your family’s future tomorrow.