Explanation of the Estate and Gift Tax Exclusion

There has been a lot of talk over the last year or so with regard to the estate and gift tax exclusion.   For federal purposes if a taxpayer passes away with more than $5,000,000 in assets and/or lifetime gifts (states have different limitations, NJ is $675,000 and NY is $1,000,000), then they are subject to estate tax.

There is currently a law in place which allows the unused portion of the dying spouse’s federal exclusion to be transferred to the surviving spouse.  This is called a deceased spousal unused exclusion amount (“DSUEA”).

An example of this would be that a man passes away and had $2,000,000 of assets and had $700,000 of taxable gifts over his lifetime.  The exclusion amount is $5,000,000 and since only $2,700,000 was used the remaining $2,300,000 can be transferred to the surviving spouse.

What is the catch?

A DSUEA may only be taken if the executor of the deceased spouse’s estate timely files a complete and properly prepared estate tax return and makes the irrevocable election on the return before the extended due date.  This means that in the above example if the surviving spouse wants the additional $2,300,000 exclusion then there must be a federal estate tax return filed.

In our example, if we exclude the possible transfer, no federal return would be required because the decedent had under $5,000,000 in combined assets and taxable gifts.  Unfortunately federal estate tax returns, even simple ones, would typically cost a few thousand dollars to prepare.  The surviving spouse must decide whether incurring the additional tax preparation costs makes sense.

Lastly, the law is currently scheduled to sunset after 2012, therefore the surviving spouse must also pass away before 2013 to benefit from the above law.  If the law is extended my guess would be that the same rules would apply.  In other words, if the law is extended to let’s say 2015 the spouse which passes away second would not be entitled to the exclusion unless an estate return was filed upon the death of the first spouse.

Conclusion

This article explains some basic concepts regarding the deceased spousal unused exclusion amount.  It is recommended that before making any decisions in this area that you not only speak with a tax professional but also an attorney and estate planning professional.  There are significant costs and benefits which must be properly analyzed in order to make an informed decision.