The estate tax exemption is slated to return to $5 million in 2026. For married individuals, the exemption is considered portable”, which means that the estate of the second spouse to pass away can benefit from the unused amount of the exemption that was available to the first spouse who passed away.
This change in tax law means that wealthy individuals’ estates can be protected from the claw of federal law through a $10 estate tax exemption. The indexed amount is $12.06 million for people who pass away in 2022. Meanwhile, transfers among spouses remain exempt from taxation due to the unlimited marital deduction. Consequently, many people do not need to be concerned about the federal estate tax.
The portability election, which has been titled by legislatures the “deceased spouse unused exemption” (DSUE) is an election utilized by an estate’s executor.
Many people can quickly become confused about the role of DSUE. Fortunately, by examining a hypothetical situation involving DSUE elections. Consider the following example:
The example with portability provision.
Bob and Ted are a married same-sex couple with two children. Each spouse owns assets assessed at $5 million and owns $10 million jointly with the right of survivorship. The total value of Bob and Ted is assessed at $20 million. Based on the wills of Bob and Ted, all assets owned by the men pass to whomever of the spouses lives longer than to the children. If John passes away in 2022, the $5 million passed on to Ted are exempt from the estate through the unlimited marital deduction. This means that the entirety of the $12.06 million exemption is not used. If an election occurs following Ted’s death, Ted’s estate can then use the $12.06 million of the DSUE as well as the exemption for the year that Ted passes away to protect the remaining $7.94 million from taxes with a sufficient amount left over for value appreciation.
The same example without the portability provision.
For the purposes of this example, imagine that Ted passed away in 2022. Without benefiting from the unused portion of John’s exemption, the $12.06 exemption for Ted in 2022 results in $7.94 million being subject to estate taxes. At a rate of 40%, the federal estate tax bill would result in $3.176 million. Various methods including traditional bypass trust can be utilized to either reduce or avoid liability associated with estate taxes, you can imagine how the DUSE election can be a powerful type of estate planning technique. These techniques routinely can be utilized to achieve estate planning goals.