PORTABILITY OF UNUSED EXCLUSION BETWEEN SPOUSES

Under the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” any applicable exclusion amount that remains unused as of the death of a spouse who dies after December 31, 2010 (the deceased spouse’s unused exclusion amount or “DSUEA”), generally is available for use by the surviving spouse, in addition to such surviving spouse’s applicable exclusion amount. Therefore, a surviving spouse can have an estate tax exclusion amount of up to $10 million, consisting of their $5 million estate tax exclusion and their deceased spouse’s unused $5 million estate tax exclusion. However, if a surviving spouse is predeceased by more than one spouse, the amount of unused exclusion that is available for use by such surviving spouse is limited to the lesser of $5 million or the unused exclusion of the last such deceased spouse.

Under the Act, a surviving spouse may use their predeceased spousal carryover amount in addition to such surviving spouse’s own $5 million exclusion for taxable transfers made during life or at death. Thus, the surviving spouse can use the remaining deceased spouse’s unused exclusion amount to avoid gift tax on any transfers made during the surviving spouse’s life. This provides a significant planning tool for estates that might not have planned well enough before the first spouse’s death.

A DSUEA is available to a surviving spouse only if an election is made on the  estate tax return (including extensions) of the first deceased spouse, regardless of whether the estate of the first deceased spouse otherwise is required to file an estate tax return. The election to use any of the DSUEA in the future must be made on this estate tax return even if the estate is under the estate tax exclusion of $5 million. If a personal representative or their advisor does not file the estate tax return, making such election, prior to the due date, then the surviving spouse could lose up to $5 million in estate tax and gift tax savings!

Important: If a spouse dies during 2011 or 2012, then it is important to keep this DSUEA and the filing date deadline in mind. You must seek the proper advice and planning as to the use of this unused exclusion to be sure no problems arise on the death of the surviving spouse. You will need to file a Form 706 Federal Estate Tax Return to take advantage of the DSUEA.

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