Deceased Spousal Unused Exclusion (DSUE) Portability
Estates of decedents dying after December 31, 2010 may elect to transfer any unused exemption for gift or estate taxes to the surviving spouse. The surviving spouse can apply this deceased spousal unused exclusion (DSUE) – often referred to as the portability option — of the last deceased spouse to cover the gift or estate tax liability arising from any subsequent lifetime gifts or transfers at death. Note, however, that the DSUE does not apply to the generation-skipping transfer tax. Note, too, that although the exemption from gift or estate taxes is indexed for inflation, the DSUE amount will equal the exemption of the previous decedent spouse at the time of death. Furthermore, a nonresident surviving spouse cannot use a DSUE unless the surviving spouse is a resident of a country with a tax treaty with the United States that allows it.
The identity of the last deceased spouse is determined on the date that any taxable gift is made or when the surviving spouse dies. The identity of the last deceased spouse is not changed by whether the surviving spouse remarries, whether the personal representative of the last spouse's estate elected the portability option, or whether the last deceased spouse had any DSUE available. So if a surviving spouse had multiple deceased spouses, then there is no option of choosing among them — only the last decedent spouse can be considered.
The DSUE of the last deceased spouse is presumed to be applied to any taxable inter vivos gifts by the surviving spouse before her own exemption is applied. If a surviving spouse has multiple predeceased spouses, then the DSUE of the last predeceased spouse, which is determined on the date that the gift is made, is applied, if available. So the DSUE of several predeceased spouses can be applied to gifts in succession, if gifts are given after the death of each spouse, but only the DSUE of the last deceased spouse can be used for any 1 gift, or if the surviving spouse dies, for her estate. The total amount of DSUE cannot exceed the overall exemption amount for gifts and estates for a single individual.
Unless the personal representative of the estate opts out of the portability election by checking the appropriate box on Part 6 of Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, the portability election is deemed to have been made with a timely filed Form 706 — meaning that the form must be filed by the due date, including extensions — if there is a surviving spouse. The portability election is irrevocable unless it is changed by filing an amended return before the due date.
As a consequence of the above rules, if no Form 706 is filed because it is not required under IRC §6018(a), which is usually the case when there is no estate tax due, then the portability option will not be available. The portability option is also not available to a nonresident decedent who is not a United States citizen.
The total DSUE that is available is equal to the total exemption allowable at the time of the decedent's death minus any exemption amounts that the decedent used for gifts or that the decedent's personal representative used for estate transfers.
If the DSUE is selected, then the amount of the DSUE that is being transferred to the surviving spouse must be calculated and any assets that are transferred to a qualified domestic trust (QDOT) must be reported. A QDOT is a trust that allows the marital deduction to be claimed when the surviving spouse is an alien. Estate taxes are assessed on any transfers from the QDOT before the surviving spouse's death, but no amount of DSUE can be applied to lifetime transfers from the QDOT before the earlier of the surviving spouse's death or the termination of the QDOT, since only then can the DSUE be calculated.