Should a Surviving Spouse file a Federal Form 706 Estate Tax Return to Claim the Deceased Spouse’s Unused Exemption from Federal Estate Tax? 

Current estate tax law demonstrates why it is so important to consult with a New Jersey estate administration and planning attorney.

A deceased individual’s estate is entitled to an exemption from Federal Estate Tax currently in the amount of $12,060,000.00.  However, since a surviving spouse pays no Federal Estate Tax on inheritances from the deceased spouse, the surviving spouse is permitted to claim the deceased spouse’s exemption for use upon the death of the surviving spouse.  When creating an estate plan and upon the death of the first spouse, a New Jersey estate attorney must consider whether the surviving spouse would benefit from claiming the deceased spouse’s exemption.  In order to claim that exemption, a Federal Form 706 Estate Tax must be prepared and filed.

The surviving spouse and her estate attorney must decide if it is beneficial to use the estate tax exemption of the first spouse to die at that time.  The decedent spouse’s estate may be valued far in excess of the exemption amount, and the deceased spouse’s exemption should be used to create a credit shelter trust that will allow assets to appreciate and accumulate outside the surviving spouse’s estate.

In the alternative, the estate administration attorney may advise the surviving spouse to using a credit shelter trust, and file a Federal Form 706 Estate Tax Return to claim that a “deceased spousal unused exclusion” (DSUE) election will be made so that the surviving spouse gets the benefit of both her own exemption and the deceased spouse’s exemption, for a total exemption of $24,120,000.00.  This is a preferable if it is unlikely that the combined estate on the death of the surviving spouse will exceed the total exemption amount.

The surviving spouse must decide upon the death of the first spouse whether they should make the DSUE election by filing a Federal Form 706. It is a complicated analysis, and far from an exact science.  That’s why consulting with an experience estate attorney is so important.  Below we discuss many factors which must be considered in making the decision.

First and foremost, the expected  size (value) the total estate upon the death of the surviving spouse is a key factor The larger the estate, even if it is below the exemption amount (currently $12.06 million), the more likely it is that it will increase in value between the death of first spouse and the death of the surviving spouse to exceed the surviving spouse’s estate tax exemption.  While it is impossible to determine what that increase will be, the size of the combined estate of the deceased spouse and the surviving spouse is clearly the first and most important factor in making the decision.

The age of the surviving spouse is another significant consideration.  The younger the surviving spouse, the more time there is likely to be before the surviving spouse passes, and thus the longer the assets will have to grow.  The health of the surviving spouse should be part of this consideration.  Further, if the surviving spouse has long-term care insurance, her estate has a better chance of holding its value, even if she is required to incur long term care costs.

If the taxable estate includes term life insurance, which is likely to terminate before the client dies, then that asset should be discounted when making the DSUE election determination. One of the reasons term insurance premiums are so reasonable compared to permanent insurance is that the beneficiary of the policy death proceeds has a smaller probability of collecting them.

If, on the other hand, there is life insurance which is likely to be collected upon the surviving spouse’s death, it must be considered in making the DSUE election.

The way the assets are invested will effect the DUE election decision.  A conservative investment portfolio will reduce the likelihood of significant increase in asset value and therefore may reduce the exposure to the estate tax upon the death of the surviving spouse.  The reverse is also true, if investments are focused on growth the value is more likely to increase above the exemption amount and the surviving spouse’s estate would benefit from claiming the exemption amount of the first spouse to die.

If a surviving spouse makes the DSUE election, and then remarries prior to her death, a portion of her own exemption can be used to pass to the children of her first marriage, and transferring her remaining exemption and any unused DSUE from her first spouse to her second spouse.  This is limited to the amount of the then current estate tax exemption.

Having a surviving spouse file a Federal Form 706 Estate Tax return to claim the DSUE is the safest and most conservative approach.  However, it is a significant undertaking and some are reluctant to incur the costs to have an estate tax return prepared and filed for the sole purpose of making the DSUE election.  If a surviving spouse’s estate is valued over $12.06 million dollars, however, the tax rate for the amounts not exempted is currently 40%.  Unless the value of the estate is likely to be significant under the exemption amount, erring on the side of caution and claiming the DSUE, is clearly worth the effort and expense of preparing and filing the return.

 

Contact Us

McLaughlin & Nardi, LLC’s New Jersey state attorneys are experienced in estate planning and estate administration.  We are available to assist with the difficult decisions required in these situations.  For more information call one of our attorneys at 973-890-0004 or fill out the contact form on this page.  We can help.