Portability: Should You File An Estate Tax Return?

Originally posted to Forbes.com

When the first of two spouses dies the survivor can safeguard the estate tax exemption that the deceased spouse’s estate did not use. The unused exemption is called the Deceased Spouse Unused Exemption or “DSUE.” The concept of passing on that exemption is called “portability.” The whole point of this is to “simplify” the estate tax system. “Simplify” is in quotes since anyone who has grappled with any aspect of our tax system knows that it is rare at best that anything in the tax Code is ever simple. To understand how portability simplified the system you need to understand what happened before portability existed. Before portability if say the husband died and wanted to protect his estate tax exemption he would bequeath assets to a trust for his wife (and often for his wife and all descendants). That would use or safeguard his exemption, permit the surviving spouse to benefit (which is often the personal goal), and avoid the assets being included in the surviving spouse’s estate. One problem with that was that it required hiring an attorney with the sophistication to draft a will (or revocable trust) that included this type of trust, dividing assets between spouses, then on death that trust had to be funded (a step that was often overlooked), and then the trust had to be administered and an annual income tax return for the trust filed. That was complicated, costly and a step that was often missed. So, Congress enacted portability so that could all be avoided. Yet portability, despite all the good intent, requires filing an estate tax return and involves a decision process and awareness that few lay people are aware of, and which many either don’t understand or fail to appreciate the benefits of.

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