
DSUE: What Is It and Why Is It Important?
When one spouse passes away, their unused federal estate tax exemption doesn’t have to disappear. The surviving spouse can elect to inherit the Deceased Spouse Unused Exemption (DSUE). This election is made possible by filing Form 706 within the required deadline, allows for the transfer of the unused exemption to the surviving spouse’s estate. This effectively increases the surviving spouse’s estate tax shield, potentially saving millions in future taxes.
However, this opportunity is not automatic. To claim the DSUE, the estate must file Form 706 within nine months of the spouse’s death, with a possible six-month extension if requested on time. Failure to meet the Form 706 portability deadline results in the permanent loss of the deceased spouse’s exemption, leaving the surviving spouse’s estate exposed to unnecessary taxation.
Understanding the mechanics of portability, and planning for its election, is crucial for families aiming to preserve generational wealth and minimize estate tax burdens. With federal estate tax exemptions set to decrease in the coming years, maximizing the benefits of portability is more important than ever.
What is the Deceased Spousal Unused Exemption (DSUE)?
The Deceased Spousal Unused Exemption (DSUE) is a valuable estate planning tool that allows a surviving spouse to inherit the unused portion of their late spouse’s federal estate tax exemption. This transfer of the exemption is known as portability and it enables the surviving spouse to effectively increase their own estate tax shield, potentially saving millions in taxes when their estate is passed on to heirs.
However, portability is not automatic. To secure the DSUE estate tax benefits, the executor of the deceased spouse’s estate must file Form 706 with the IRS within nine months of death, although a six-month extension is available if requested on time.
How DSUE Works: The Basics
To make use of the Deceased Spousal Unused Exemption (DSUE), a critical step must be taken during estate administration: filing Form 706 with the IRS. This form, known as the United States Estate (and Generation-Skipping Transfer) Tax Return, must be completed within nine months of the spouse’s death. An automatic six-month extension is available if Form 4768 is filed before the original deadline. This timeline is crucial, missing the Form 706 portability deadline can result in the permanent loss of the unused estate tax exemption.
DSUE Calculation Example:
To understand the benefits, consider a real-world scenario: A couple has a $20 million estate. The first spouse passes away, using only $8 million of the estate tax exemption. If the federal exemption is $13.99 million, the unused $5.99 million is preserved through the DSUE election. The surviving spouse now has their own $13.99 million exemption plus the additional $5.99 million, protecting almost $20 million from estate tax.
It is important to remember that portability is not automatic. The executor must complete and file Form 706 to secure this benefit.
The Advantages of Electing Portability
One of the key benefits of electing portability is the ability to preserve the unused estate tax exemption from the first spouse to pass away. This strategic move allows the surviving spouse to effectively double the amount protected from federal estate taxes. Given the current exemption level of $13.99 million per person (as of 2025), a married couple could shield up to $27.9 million from estate taxes with proper planning.
Portability is especially important for estate planning before the exemption sunsets. The federal estate tax exemption is set to decrease in 2026, potentially exposing more families to estate taxes. By electing portability when the first spouse passes away, the surviving spouse locks in the higher exemption amount, even if the limits are reduced in the future.
For families with appreciating assets like real estate or business interests, this election can result in substantial estate tax savings strategies. For example, a surviving spouse with a DSUE from their late partner can reduce or even eliminate estate taxes on properties that grow in value over time.
The Drawbacks and Limitations of DSUE
While electing portability offers powerful estate tax savings, it’s not without its limitations. One of the biggest considerations is its federal-only application. Portability only applies to federal estate taxes, not state-level estate taxes. If you live in a state with its own estate tax, relying solely on DSUE may leave your heirs exposed to unexpected tax liabilities. Luckily, North Carolina has no estate tax.
Another major limitation arises in estate tax planning for remarried spouses. The portability election is tied to the “last deceased spouse.” This means if the surviving spouse remarries and their new spouse passes away, the DSUE from the first marriage is lost. The surviving spouse would only inherit the unused exemption of the most recent spouse, which could be significantly less.
DSUE also does not account for asset appreciation. Unlike a credit shelter trust (A/B Trust), which locks in the value of assets at the first spouse’s death, portability only captures the exemption amount, not any future growth. For families with appreciating real estate or business assets, this can lead to larger estate tax burdens.
Portability vs. A/B Trust Planning: Which is Better?
When it comes to estate tax planning strategies, the choice between portability and A/B Trust Planning often depends on the family’s financial goals and the complexity of their estate. While portability allows the surviving spouse to inherit the unused estate tax exemption of their deceased partner, A/B Trust Planning (or credit shelter trust planning) creates a different layer of protection.
Key Differences:
- Portability simply transfers the unused exemption amount to the surviving spouse. It is straightforward and avoids the administrative complexity of trust maintenance. However, it only applies to federal estate taxes and does not shield appreciating assets from future estate taxes.
- A/B Trust Planning splits the estate into two separate trusts upon the death of the first spouse: the “A” Trust (Survivor’s Trust) and the “B” Trust (Bypass Trust). The assets in the B Trust are locked in at their value upon the first spouse’s death, avoiding future estate tax even if those assets appreciate. Additionally, assets in a B Trust are protected from creditors and can be directed to specific heirs without being influenced by the surviving spouse’s decisions or potential remarriage.
Which is Better?
For families with high-value real estate, business interests, or concerns about creditor protection, A/B Trusts offer more robust estate tax planning strategies. They secure asset values and prevent appreciation from increasing tax liability. On the other hand, portability provides simplicity and is ideal for estates currently below the federal exemption limit.
In many cases, the best approach is a combination of both: using portability for simplicity and an A/B Trust for larger, appreciating assets.
Common Mistakes When Electing Portability
Electing portability can save a family millions in estate taxes, but there are common pitfalls that often lead to missed opportunities. One of the biggest misconceptions is assuming that if no estate tax is due, Form 706 does not need to be filed. In reality, filing Form 706 is required to elect portability, even if the estate falls below the federal estate tax threshold. Skipping this step permanently forfeits the Deceased Spousal Unused Exemption (DSUE), which could have shielded additional assets from estate tax.
Another frequent mistake is missing the strict filing deadline of nine months after the first spouse’s death. While the IRS does allow for Form 706 late filing relief under certain conditions, it is not guaranteed and often involves additional costs and administrative hurdles. The IRS introduced a simplified process for late elections under Revenue Procedure 2022-32, allowing estates under the federal filing threshold to elect portability up to five years after death. However, this is still a limited window and only applies if the estate was otherwise not required to file Form 706.
Finally, incomplete or inaccurate filings are common errors that can delay the election process. To avoid these issues, it’s important to work with an experienced estate planning professional. The Form 706 is traditionally prepared by attorneys and not CPAs, so think twice before letting your regular tax preparer do this filing for you.
Practical Scenarios: When DSUE Makes Sense
Portability planning through the Deceased Spousal Unused Exemption (DSUE) is particularly valuable in specific estate planning scenarios. For high-net-worth families, it provides a way to maximize the federal estate tax exemption for the surviving spouse, potentially shielding millions more from taxation.
Estate Tax Exemption for Business Owners
Portability is also incredibly effective for business owners. Many family businesses appreciate over time, and without proper estate planning, heirs might face significant estate taxes that could force a sale of business assets. By securing the DSUE, the surviving spouse can protect more of the business’s value from federal estate taxes, ensuring smooth succession without the need for liquidation.
Portability Planning for Real Estate Investors
For real estate investors, portability shields appreciating property from estate taxes. Consider a couple with substantial real estate holdings. If the first spouse passes away and portability is elected, the surviving spouse gains additional exemption coverage. This means properties that appreciate over the years are less likely to trigger federal estate taxes when transferred to heirs.
Frequently Asked Questions (FAQ)
What is portability in estate tax planning?
Portability in estate tax planning allows a surviving spouse to inherit the unused portion of their deceased spouse’s federal estate tax exemption. This is known as the Deceased Spousal Unused Exemption (DSUE). To claim it, the executor must file Form 706 with the IRS within nine months of the spouse’s death.
Do I need to file Form 706 if no estate tax is owed?
Yes, even if no estate tax is owed, Form 706 must be filed to elect portability. This allows the surviving spouse to inherit the unused exemption amount. Without filing, the DSUE is permanently lost, which could lead to substantial estate taxes later.
What happens if I miss the Form 706 deadline?
If the Form 706 portability deadline is missed, the DSUE cannot be claimed unless special relief is granted by the IRS. Under Revenue Procedure 2022-32, a simplified method allows certain estates to file up to five years late, but only if the estate was under the federal filing threshold.
Can portability be used for real estate and business assets?
Yes, portability is particularly effective for real estate investors and business owners. By inheriting the unused estate tax exemption, the surviving spouse can shield appreciating assets like properties or business interests from estate taxes upon their passing.
How does remarriage affect DSUE?
If the surviving spouse remarries and their new spouse passes away, the DSUE from the first spouse is replaced by the unused exemption of the most recent spouse. This is called the last deceased spouse rule and can lead to a loss of the original DSUE if not planned for.
Effective estate planning is about more than just passing on wealth, it’s about preserving it for future generations and protecting your family from unnecessary taxes and legal complications. The Deceased Spousal Unused Exemption (DSUE) and the Portability Estate Tax are powerful tools that can shield your estate from excessive tax exposure. But these benefits are only available if the proper steps are taken within the required deadlines. Missing those deadlines can mean forfeiting substantial savings and leaving your heirs vulnerable to financial strain.
If you’re unsure whether portability is right for your family or want to explore strategies to preserve wealth with portability, now is the time to act. An experienced estate planning attorney can guide you through the process, ensuring your legacy is protected and your family is well cared for.
Take the first step today and schedule an initial consultation to understand your options and secure your family’s financial future.