Believe it or not, the Internal Revenue Service occasionally makes rules that help taxpayers. Such was the case on July 8, when the IRS issued a revenue procedure that allows estates to elect “portability” of a deceased spousal unused exclusion amount (DSUEA) up to five years after the decedent’s date of death.

If you lost a spouse within the last five years and you act within that five-year window, this could provide a tremendous federal estate tax savings for your heirs.

A bit of background might be helpful. Under federal law, each citizen can pass up to $12,060,000 to their heirs without estate tax. In other words, up to $12.06 million is excluded from taxation. Also, any amount that you leave to your spouse is excluded from estate tax, but whatever you give your spouse becomes part of their estate, to which they will apply their own exclusion. By using both spouse’s exclusion amounts, the couple can leave over $24 million to their heirs free of federal estate tax.

Unless you plan to die soon, however, beware. Although the $12.06 million exclusion amount increases annually with inflation, in 2026, the inflation-adjusted figure will be cut in half. If inflation pushes it up to $14 million, then the exclusion will drop to $7 million.

Prior to 2011, the exclusion amount was smaller ($3.5 million in 2009), and if you left assets to your children valued at less than your exclusion amount, the leftover exclusion was simply wasted. Thus, a couple needed to maximize the total dollar amount left to children at the first death, so each could fully use their respective exclusions.

Based on law that took effect in 2011, the estate tax exclusion amount became “portable.” Since then, if a person dies leaving a surviving spouse and does not give assets to heirs other than their spouse equal to their exclusion amount, the leftover (unused) exclusion can be transferred to the survivor to add to his or her own exclusion amount.

How it works

Illustrating in today’s numbers, a husband might die, leaving his entire estate to his wife and nothing to his children. Doing so would not use any of his $12.06 million exclusion amount. His estate representative can notify the IRS that his $12.06 million unused exclusion amount (DSUEA) is transferred to his wife. If she dies in 2023 and her own inflation-adjusted exclusion amount is $13 million, she can then leave $25.06 million to children, free of tax.

Now assume that the wife did not die in 2023 but lived into 2026. Say the inflation-adjusted exclusion amount had grown to $14 million, then dropped to half, $7 million. She could pass an estate of up to $19.06 million to children tax free using her husband’s leftover $12.06 million exclusion transferred to her in 2022, and her own $7 million exclusion.

However, the transfer of a deceased person’s leftover exclusion amount to a surviving spouse is not automatic. The representative of the decedent’s estate must file an estate tax return and declare what assets passed to other heirs (i.e., how much, if any, of the decedent’s exclusion used) and identify the surviving spouse who is receiving the unused exclusion. A simplified estate tax return process is permitted. The due date of the estate tax return is nine months after the death, unless an extension of time for filing is obtained.

What you can do

I suspect quite a few people lost a spouse in the last five years and did not file the estate tax return to transfer the DSUEA. In 2019, the exclusion amount was $11.4 million. Say you and your spouse each owned $5 million, and your spouse died that year, leaving $4 million to children and $1 million to you. This made your estate total $6 million, mostly farmland. Thinking that your exclusion of $11.4 million was far larger than your estate, you didn’t file an estate tax return to claim her DSUEA of $7.4 million.

But what has happened since? Your $6 million estate has appreciated to $9.5 million, with no end in sight. You fully expect to live into 2026, when your exclusion will be dropping to around $7 million. If you die then, federal tax would be $1 million. What should you do?

Clean up the leftovers. Under the new IRS procedure, your late spouse’s estate representative can claim an automatic extension of time (up to five years from death) to file an estate tax return and transfer the DSUEA of $7.4 million to you. Added to your own projected $7 million exclusion, this gives you $14.4 million in total available exclusion.

Don’t waste the leftovers.

Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com. The opinions of this writer are not necessarily those of Farm Progress/Informa.