Electing to Transfer the Deceased Spousal Unused Exclusion (DSUE) Amount (Portability Election)
For deaths after 2010, the executor can elect to transfer the decedent’s unused exclusion amount to the surviving spouse. Generally, the DSUE is the lesser of (a) the basic exclusion amount ($11.4 million for 2019) or (b) the excess of the last deceased spouse’s applicable exclusion amount over that spouse’s taxable estate plus adjusted taxable gifts (i.e., the adjusted taxable estate). This is commonly referred to as the portability election.
If the surviving spouse remarries, the surviving spouse keeps the DSUE transferred from his or her deceased (first) spouse. However, if the new (second) spouse dies before the surviving spouse, the DSUE transferred from the first spouse will be lost and replaced with the DSUE, if any, from the new (second) spouse. This is because the prior spouse is no longer the last deceased spouse.
The portability election is available for federal estate and gift tax, but not for generation-skipping transfer tax. However, it does not apply to a pre-deceased spouse who dies as a nonresident noncitizen of the United States. Also, although the basic exclusion amount is adjusted for inflation, the DSUE amount is determined as of the year of death for the first spouse to die and is not adjusted for inflation thereafter.
The decision to elect portability and/or use a bypass trust depends on many factors, including the anticipated appreciation of the assets owned by the surviving spouse, the type of assets held by the deceased spouse, and the surviving spouse’s life expectancy. Furthermore, the effect on the beneficiary’s interest under a decedent’s overall estate plan should be considered, such as the ability of the deceased spouse or surviving spouse to qualify for other preferential provisions under IRC Sec. 303, 2032, 2032A, or 6166.
Although the decision of whether to rely on portability to use the full applicable exclusion amount of both spouses is challenging, the following situations are most likely to benefit from the portability election:
1. Married couples in which the combined estate is taxable but is less than twice the amount of the basic exclusion amount ($22.8 million in 2019).
2. The combined estate of the married couple consists primarily of assets that are not conducive to funding a bypass trust (e.g., retirement plans, primary residence, or IRD).
3. Married couples who reside in states that impose a death tax.
Who Can Elect
The executor of the estate if the decedent has unused exclusion amounts and a surviving spouse.
When to Elect
By the due date, including extensions, of Form 706 [United States Estate (and Generation-Skipping Transfer) Tax Return]. However, executors filing only to elect portability, may file Form 706 on or before the second anniversary of the decedent’s death (Rev. Proc. 2017-34).
How to Elect
By filing a complete and timely Form 706 and completing Form 706, Part 6—Portability of Deceased Spousal Unused Exclusion (DSUE). Executors of estates not otherwise required to file Form 706 will generally not have to individually report the value of certain property qualifying for the marital or charitable deduction.
IRC Sec. 2010(c)(5); Reg. 20.2010-2.