What Is the Estate Tax Exemption When One Spouse Dies?

The federal estate tax is a tax on the transfer of a person’s assets after death, calculated on the value of their gross estate. This includes all property they owned or had an interest in, such as cash, real estate, stocks, and retirement accounts. For 2025, the federal estate tax exemption is $13.99 million per individual. An estate valued at or below this amount will not owe any federal estate tax, while estates exceeding this threshold are subject to a tax rate as high as 40%. This high exemption means a very small percentage of estates are subject to this tax. Special rules apply to married couples that can alter how the estate tax is applied when one spouse dies.

The Unlimited Marital Deduction

The unlimited marital deduction allows an individual to transfer an unrestricted amount of assets to their surviving spouse during their lifetime or at death without incurring federal estate or gift tax. For the deduction to apply, the surviving spouse must be a U.S. citizen. This provision ensures a surviving spouse can receive their deceased partner’s entire estate without an immediate tax consequence.

This deduction operates separately from the individual estate tax exemption. For example, if a person with a $20 million estate dies and leaves it all to their U.S. citizen spouse, the entire $20 million passes tax-free, regardless of the 2025 exemption amount. The estate tax liability is deferred, not eliminated. The value of the inherited assets will be included in the surviving spouse’s estate and subject to tax upon their death, based on the exemption available in that year.

The unlimited marital deduction only applies to transfers to a spouse and cannot be used for other beneficiaries. If the deceased spouse leaves assets to children or other heirs, those transfers are measured against their individual estate tax exemption. The marital deduction specifically facilitates the seamless transfer of assets between spouses, providing financial stability for the surviving partner.

Understanding Portability of the Estate Tax Exemption

Portability allows a surviving spouse to use the unused portion of their deceased spouse’s federal estate tax exemption, adding it to their own. This effectively increases the amount they can pass on to their heirs tax-free. This provision is not automatic and must be elected by the executor of the deceased spouse’s estate.

The amount of the unused exemption transferred to the surviving spouse is the Deceased Spousal Unused Exclusion (DSUE). The DSUE is calculated by taking the deceased spouse’s exemption for the year of their death and subtracting the value of their taxable estate. For instance, if a spouse dies in 2025 with a $13.99 million exemption and a taxable estate of $4 million, the DSUE amount is $9.99 million.

This calculated DSUE amount can then be used by the surviving spouse. When the surviving spouse later dies, their own estate tax exemption will be combined with the DSUE amount from their deceased partner. This allows the couple’s total exemption to be fully utilized, even if the first spouse to die did not use their entire individual exemption.

Information Required to Elect Portability

To elect portability, the executor must gather extensive information for IRS Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return. This starts with a comprehensive inventory of all the deceased spouse’s assets, including:

• Real estate
• Bank accounts
• Stocks and bonds
• Retirement funds
• Valuable personal property like art or jewelry

For each asset, the fair market value as of the date of death must be determined, which may require formal appraisals. After the gross estate is determined, deductions for debts, funeral expenses, and administrative costs are subtracted to arrive at the taxable estate. Compiling this information can be a complex process, often necessitating the assistance of legal and accounting professionals.

How to Make the Portability Election

The executor of the deceased spouse’s estate makes the portability election by filing a completed Form 706 with the IRS. The deadline for filing is nine months after the date of death. A six-month extension can be requested by filing Form 4768.

A simplified method for making a late portability election is available for estates not otherwise required to file because their value is below the exemption amount. This relief is available for up to five years after the decedent’s death. The completed Form 706 should be mailed to the address specified in the form’s instructions.

Once the return is filed, the IRS processes it and the DSUE amount is officially recorded for the surviving spouse’s future use. The surviving spouse may receive a closing letter from the IRS confirming the acceptance of the return. This DSUE amount is then available to be applied against any taxable gifts the surviving spouse makes during their lifetime or to their estate upon death.

Surviving Spouse Considerations

A surviving spouse with a DSUE amount is subject to the “last deceased spouse” rule. This rule dictates that a surviving spouse can only use the DSUE from their most recently deceased spouse. If the surviving spouse remarries and their new spouse also predeceases them, any DSUE from the first deceased spouse is lost.

For example, if a widow has a $5 million DSUE from her first husband and remarries, and her second husband dies with no unused exemption, she loses the $5 million DSUE. She can only use the DSUE from her last deceased spouse, which in this case is zero. This rule has a substantial impact on estate planning for individuals who may remarry.

Surviving spouses should consider strategic gifting. By using the DSUE amount to make tax-free gifts before remarrying, the surviving spouse can ensure that the benefit of the first deceased spouse’s exemption is not lost. This requires careful planning and an understanding of the long-term implications of remarriage on their estate plan.