One of the helpful provisions recently added to federal estate tax law allows a surviving spouse to use any “leftover” or “unused” federal estate tax exclusion amount of a deceased spouse. The federal estate tax exclusion amount has been increased to $5,250,000 in 2013 (to be adjusted for inflation in future years), and many first-to-die spouse’s estates will be less than that amount. In such cases, the surviving spouse can file a federal estate tax return to claim the first-to-die’s “Deceased Spousal Unused Exclusion” (“DSUE”) amount.
For example, suppose the first-to-die spouse leaves $3,250,000 of assets passing through his estate to children. Further, suppose that the survivor has $7,000,000 of assets of her own. By filing a federal estate tax return for the first-to-die spouse, the “unused” $2,000,000 of federal estate tax exclusion (DSUE) amount can be “claimed” and used by the surviving spouse to shelter otherwise taxable gifts or inheritances flowing from the survivor. Thus, in this example, after the DSUE is “claimed” by the surviving spouse, she would have an effective federal estate and gift tax exclusion amount of $7,250,000 (his/her “own” $5,250,000 exemption, plus the DSUE of $2,000,000 from the first-to-die spouse).
With the added “shelter” provided by the DSUE amount, the survivor’s entire $7,000,000 could pass without any federal estate tax. If the survivor did not claim the DSUE amount, her estate would potentially be subject to estate tax of $700,000. By claiming the DSUE, no federal estate tax would be due on the survivor’s $7,000,000. Quite a difference!
The DSUE amount may be claimed only on a timely-filed federal estate tax return for the first-to-die’s estate. Once claimed and approved, the surviving spouse can use the DSUE amount to make tax-free gifts during his/her life or to shelter additional amounts from estate tax when the surviving spouse dies.
To learn more about the DSUE, its planning implications, or how to claim the exclusion, you should contact your personal tax or estate planning adviser, or contact Kevin Robertson at krobertson@bakerlaw.com, (216) 861-7977.