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What Is the Last Surviving Spouse Rule?

Posted by Mona O'Connor | Jan 12, 2024 | 0 Comments

What Is the Last Surviving Spouse Rule?

 

Estate planning can be a significant part of successful financial management, especially for married couples. One key consideration is minimizing estate taxes, which can substantially affect the distribution of money and property to a married couple's loved ones.

What Are Gift and Estate Taxes?

In 2024, a $13.61 million federal exemption per person for gifts and estate taxes means many individuals with a high net worth will not owe federal estate tax if they die in 2024. An individual can give away up to $13.61 million in 2024 to children or other non-spouse beneficiaries during their lifetime or after their death. They will pay 40 percent in estate taxes only on gifts that exceed that amount.

You may believe you or your spouse will never have more than $27.22 million combined; but the current exclusion will revert to the pre-2017 amount—$5 million adjusted for inflation—on January 1, 2026, if Congress does not act.

That means the 40 percent estate tax rate could apply to gifts over approximately $6.4 million come 2026, requiring many families with high net worth to reevaluate their estate plan and adjust legal strategies to preserve and protect more of their property and investments. Changes may include taking advantage of the deceased spousal unused exclusion amount (DSUEA) if they pass away prior to January 1, 2026.

What Is the Deceased Spousal Unused Exclusion Amount?

The Tax Relief Act of 2010 introduced the concept of portability—the ability of a surviving spouse to use their deceased spouse's unused exclusion amount—and made it permanent in 2013. Before then, if a person died with wealth below the federal estate tax exemption amount and did not use their exemption, it was lost forever.

Today, the DSUEA can be used to increase the estate tax exemption for the surviving spouse. When the first spouse dies, the other can elect to port their spouse's unused exemption within five years of the spouse's death and add the unused exemption to their own. To have the DSUEA available for the surviving spouse to use, a representative of the decedent's estate, possibly the spouse, must file a federal estate tax return (Form 706) to report the DSUEA.

Widows and Widowers Cannot Collect Estate Tax Exclusions

If you are a widow or widower who has been married before, the portability rule lets you use the DSUEA of your last deceased spouse to offset the tax on any transfer during your life or at death. If you have more than one predeceased spouse, you can use the DSUEA of multiple spouses, but the decedent whose DSUEA is being used must be the survivor's last predeceased spouse when their DSUEA is being used. A surviving spouse may not use the sum of DSUEA from multiple predeceased spouses at one time or apply the DSUEA after the death of a subsequent spouse.

How It Works

Portability can make a significant difference when it comes to the taxation of an estate.

Remarriage with Second Spouse Dying

Example. Bob and Sue were married with jointly titled property and a net worth of $16 million. Bob died first in 2020 with a federal estate tax exemption of $11.58 million. Sue inherited all of Bob's property, and because of the unlimited marital deduction, none of Bob's exemption was used. Sue elected portability by filing an estate tax return on time, and was able to add Bob's $11.58 million to her own exemption of $12.92 million. Sue gets remarried to Dan in 2021. Dan dies in 2022, and after an estate tax return is filed, he has a DSUEA of $6 million. Sue then dies in 2023 with an estate worth $16 million. At her death, she has her estate tax exclusion amount of $12.92 million and Dan's $6 million since he was her last predeceased spouse.

If Sue had a larger estate or wanted to make gifts during her lifetime, she may be able to make large lifetime gifts over the annual exclusion amount ($18,000 in 2024) during her lifetime while Bob was her last predeceased spouse (before Dan dies) and use Bob's DSUEA to prevent having to pay gift tax on the large lifetime gifts. As soon as Dan dies, however, he becomes her last predeceased spouse and she will no longer be able to use Bob's DSUEA.

Tax Planning Can Get Tricky

We understand that trying to navigate the tax rules can be a daunting task. We are here to assist you in better understanding the options available to you and crafting the best estate and financial plan to meet your unique situation. To learn more about strategies to protect yourself, your loved ones, and your life savings, give us a call.

 

About the Author

Mona O'Connor

Mona L. O'Connor joined the firm in 2008 and is currently a partner with O'Connor Law Offices. She is a J.D., C.P.A. and her primary areas of practice include estate planning and trust administration.

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