The Deceased Spouse Unused Exemption (DSUE) is a little known and often overlooked provision in the tax code in the Estates and Trusts area.

Each taxpayer (in a marriage) is allowed the current tax year (for 2017) estate tax exclusion of $5.49MM, so if the proper tax planning has been done, a total of $10.98MM could be excluded from estate tax.

Here are two examples using the same facts that have very different outcomes.
 

Scenario A:

Spouse A and B each have been married before they married each other. As a result, they keep their assets separately in their own names. Spouse A has $2MM of assets and Spouse B has $4MM of assets.

Spouse A passes in 2016. He leaves all his assets to Spouse B. Because of the marital deduction, there is no estate tax on Spouse A’s estate, but now Spouse B had $6MM of assets.

Spouse B passes in 2017 with a $6MM estate, over the estate tax exclusion of $5.49MM. Her estate will have a taxable value of $510,000.
 

Scenario B:

Upon the death of Spouse A, Spouse B files federal tax Form 706 within nine months of the decedent’s death electing “portability” of Spouse A’s “unused exemption”.

At Spouse A’s date of death, his assets were $2MM. He had an “unused exemption” of $3.49MM. Form 706 should be filed to claim this even if the deceased spouse’s assets are below the estate exclusion minimum.

Spouse A’s “unused exemption” of $3.49MM is added to Spouse B’s estate tax exclusion of $5.49 MM and now Spouse B has an estate tax exclusion of $8.98MM.

When she passes in 2017 with $6MM in assets but an

$8.98 million exclusion, her estate is not taxable.