Federal Estate Tax for a Married Couple

The federal estate tax is a tax imposed on the transfer of a person’s assets to their heirs after death. It is calculated based on the value of the decedent’s “gross estate,” which includes all property they owned or had an interest in, such as cash, securities, real estate, and business interests.

Federal law provides a substantial exemption, meaning the tax only applies to estates with values exceeding this high threshold. For 2025, the federal estate tax exemption is $13.99 million per individual. Consequently, a very small percentage of estates in the United States are subject to this tax. For estates that do exceed the exemption, the top tax rate is 40%.

This tax is distinct from an inheritance tax, which is paid by the person who receives the assets; the federal government does not have an inheritance tax. The responsibility for paying the federal estate tax falls on the estate itself before any assets are distributed.

The Unlimited Marital Deduction

The unlimited marital deduction is a provision of U.S. federal estate and gift tax law that allows an individual to transfer an unrestricted amount of assets to their surviving spouse without incurring any federal estate tax. This transfer can occur during one’s lifetime as a gift or at death as an inheritance. The principle is that a married couple is treated as a single economic unit, and transfers between them should not trigger a tax event.

For the unlimited marital deduction to apply, the surviving spouse must be a U.S. citizen. This requirement ensures that assets do not leave the U.S. tax system without potential taxation. If the surviving spouse is not a U.S. citizen, achieving a similar tax deferral requires the use of a specific type of trust known as a Qualified Domestic Trust (QDOT).

The primary effect of the unlimited marital deduction is tax deferral, not tax elimination. When the first spouse dies and leaves all their assets to the surviving spouse, no estate tax is due at that time because of the deduction. The assets are rolled into the surviving spouse’s estate, and the potential for estate tax is postponed until the death of the second spouse, at which point their total estate will be subject to taxation.

This deferral provides a seamless, tax-free transfer of wealth to the surviving partner, ensuring their financial stability. The planning focus then shifts to managing the size of the surviving spouse’s future estate.

Utilizing Portability for the Surviving Spouse

Portability allows a surviving spouse to use any unused portion of their deceased spouse’s federal estate tax exemption. This unused amount is known as the Deceased Spousal Unused Exclusion, or DSUE. This provision adds flexibility and simplifies planning, as it helps prevent the “waste” of the first spouse’s exemption.

The DSUE amount from the first spouse to die is added to the surviving spouse’s own exemption, effectively combining them. This transfer is not automatic and requires a specific action by the executor of the deceased spouse’s estate. Before portability, complex trust structures were often necessary to ensure both spouses’ exemptions were fully utilized.

For example, imagine the first spouse passes away with an estate valued at $4 million. Since these assets are transferred to the surviving spouse using the unlimited marital deduction, none of the deceased spouse’s $13.99 million exemption is used. The unused portion is therefore the full $13.99 million.

By electing portability, the executor can transfer this DSUE amount to the surviving spouse. The surviving spouse now has their own exemption plus the DSUE from their deceased partner, for a total combined federal estate tax exemption of $27.98 million. This allows the surviving spouse to shelter a much larger amount of assets from estate tax upon their death.

Making the Portability Election

The portability election is not automatic. To make the election, the executor of the deceased spouse’s estate must file a federal estate tax return, Form 706. This filing is required even if the estate’s value is below the threshold that would normally necessitate a return and no estate tax is owed.

The deadline for filing Form 706 is nine months after the date of the decedent’s death, but it is possible to request a six-month extension. For estates that are not otherwise required to file and are doing so only to elect portability, the IRS provides an extended window, allowing the return to be filed up to five years after the decedent’s death.

Completing Form 706 for a portability election involves gathering information about the deceased spouse’s assets and their values. The executor must complete the return, including Part 6, which is dedicated to the portability election and calculates the DSUE amount. For returns filed solely to elect portability, the IRS allows for a simplified reporting of assets where the executor can provide good-faith estimates rather than formal appraisals.

The executor makes the election by filing the complete and timely Form 706, as filing the return itself serves as the election. An estate can choose to opt out of portability by explicitly stating so on Part 6 of the form. Failing to file the return within the prescribed timeframe means the opportunity is permanently lost.

Advanced Planning with Trusts

While portability offers a straightforward approach, some married couples opt for more structured planning using trusts, particularly a Bypass Trust. This type of trust, also known as a Credit Shelter Trust, provides a different method for utilizing the deceased spouse’s estate tax exemption and offers benefits related to asset control and protection from future tax on asset appreciation.

When the first spouse dies, an amount up to their available estate tax exemption is placed into an irrevocable Bypass Trust. This action “uses” the deceased spouse’s exemption at the time of their death. The surviving spouse is the primary beneficiary of this trust and can receive income and, if needed, principal from the trust’s assets according to the terms set by the deceased spouse.

A feature of the Bypass Trust is that the surviving spouse does not have legal ownership or control over the trust assets. Because the assets are owned by the trust, they are not considered part of the surviving spouse’s estate upon their subsequent death. This means that any growth in the value of the assets within the Bypass Trust is sheltered from federal estate tax.

Using a Bypass Trust also provides greater control over the ultimate disposition of the assets. The first spouse to die determines, within the trust document, who will inherit the remaining trust assets after the surviving spouse passes away, such as children from a previous marriage. Assets held in an irrevocable trust are also protected from the surviving spouse’s creditors or claims that might arise from a subsequent remarriage.