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Locking in Unused Federal Estate Tax Exemption

Estate Planning For Life's Stages

If you have lost your spouse during this time, there are so many issues you must address–funeral arrangements, meeting with lawyers and accountants and dealing with finances. All of this comes on top of dealing with the emotional loss.
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Many people have died during the COVID crisis, and are coping with the death of a spouse, one of life’s biggest challenges. Among the details that need to be taken care of is locking in the deceased spouse’s unused federal estate tax exemption, says a recent article from Forbes titled “4 Things You Should Know About The Death Tax Exemption.”

The deceased spouse unused exemption (DSUE) is the amount of federal estate tax exemption the spouse’s estate did not use up. When a person dies, a federal estate tax, known also as the “death” tax, is imposed on any assets over a certain amount. The estate tax exemption amount covers the assets that fall below that amount.

The threshold has changed over the years. It is at a historically high level of $11,580,000. This is likely to change in the future, as the federal government needs to pay for COVID-related costs. For now, this level is scheduled to increase every year until 2026, when it will drop to $5 million (adjusted for inflation). However, it may drop sooner.

The DSUE is locked in when you file your deceased spouses’ estate tax return, due nine (9) months after the date of death. If a spouse died in 2020 with the current exemption of $11,580,000 in place and used up $6,580,000 of the exemption amount, the surviving spouse will be able to add $5,000,000 to their exemption amount.

The surviving spouse would then have their own $11,580,000 exemption, plus the $5,000,000 from the deceased spouse’s exemptions. For high net worth families, this is an exceptionally beneficial tax option.

Here’s an important note: even if a spouse leaves all of their assets to their spouse and no federal estate taxes are due, an estate tax return still needs to be filed, if the surviving spouse is to lock in the DSUE. If the surviving spouse does not file an estate tax return in a timely fashion, the DSUE will be lost. The estate tax savings to the heirs could be in the millions.

If the estate tax exemption drops to prior levels, such as $3,500,000, the family will still be able to claim the DSUE when the second spouse dies. This could be a big help for heirs in reducing or eliminating taxes on the second spouse’s estate. Many people may not have an estate worth $11 million, but by adding up the value of a home, retirement accounts, life insurance and other assets, a $5 million level of assets is not unheard of.

There will also be state estate taxes, depending upon where a family lives. They will also need to be considered in administering the spouse’s estate and filing a return.

Your estate planning attorney will be able to analyze the federal and state estate taxes to achieve the best possible outcome for you and your spouse.

David Payne Law - Estate Planning in MissouriReference: Forbes (Aug. 17, 2020) “4 Things You Should Know About The Death Tax Exemption”

Suggested Key Terms: Deceased Spouse Unused Exemption, DSUE, Estate Planning Attorney, State Taxes, Heirs, Second Spouse, Death Tax, Heirs

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