Although Indiana does not tax estates or gifts, the federal government does maintain a steep tax rate on these for individuals who leave qualifying estates or give large amounts of gifts. As the IRS describes it, the estate tax is a “tax on your right to transfer property at your death.” This is why gifts and estates are taxed together—in case a taxpayer tries to give away their estate before death to avoid taxation.

The estate tax exemption includes not only the value of the estate but the total value of taxable gifts that the deceased person made in their lifetime, as far back as 1977. However, there is a generous threshold for estates and for lifetime gift-giving, and the value is adjusted yearly by law. During 2023, the exemption amount is $12,920,000.

If you do not expect to have $13 million in your estate, you may wonder: what does all this have to do with you? It may yet affect you directly due to changes in law and policy—especially if you are married.

Congress effectively doubled estate and gift tax thresholds in 2018, but that law expires in 2025. The 2026 exemption will return to a previous schedule, probably totaling around $6.8 million.

Between estates and lifetime gift-giving, even a reasonably affluent married couple may meet the threshold. And a future Congress may even decide to lower the threshold further. But the law has created a tool for couples in this situation—portability.

How Portability Works

Since 2010, it has been possible for a widow or widower to receive the unused portion of their spouse’s estate and gift tax exemption. If the estate’s personal representative files the correct forms in a timely fashion, the surviving spouse can elect to add this amount to their own estate and gift tax exemption. The “portable” amount is referred to as the DSUE (deceased spouse’s unused exclusion).

  •         Example: Alice and Bob. Alice died in 2023, leaving an estate worth $2,000,000. That is well under the exemption threshold of $12,920,000, and it leaves $10,920,000 unused. Bob may elect portability for this DSUE. This will add it to his own exemption total. If Bob also dies in 2023, his estate will have a total exemption of $22,920,000.

In order to qualify for portability, the deceased person must have been a US citizen, legally married at death. There is no portability between ex-spouses. Furthermore, the DSUE can only come from the most recently deceased spouse. If the surviving spouse remarries after electing portability, they retain the DSUE that they elected unless their new spouse again dies before them. Widowed spouses can only retain the unused exemption thresholds of the spouse that predeceased them, not any DSUE that the spouse elected after a previous marriage.

  •         Example: Charlie and Delta. Charlie passed away in 2019, survived by Delta. In 2019, the estate tax exemption was $11,400,000. Charlie’s taxable estate was worth $6,000,000. Delta elected portability for the DSUE of $5,400,000. Eventually, Delta decided to marry again.

During the lifetime of Delta’s second husband, Craig, she retains Charlie’s DSUE as part of her personal estate and gift tax threshold, and she can use it to make gifts. But if Craig dies before Delta does, Charlie’s remaining DSUE will no longer apply to her because Charlie will not be her most recently deceased spouse. She can choose to elect Craig’s DSUE, if he leaves any.

  •         Example: Craig and Delta. As it happens, Delta predeceases Craig. She leaves an estate worth $5,000,000. Delta never did use Charlie’s DSUE of $5,400,000. But Craig cannot elect that amount; it is not available to him. He can only elect the DSUE from Delta’s personal estate tax and gift threshold.

For the spouse to claim the DSUE, the estate’s personal representative must file a Form 706, the estate tax return. For an estate under the threshold, a Form 706 is not always necessary, but it is required for a surviving spouse to elect portability for the DSUE. The IRS has recently extended the filing time to five years for spouses intending to use Form 706 for this purpose only.

  •         Example: Eva and Fred. Eva passed away in 2020, survived by Fred. In 2020, the estate tax exemption was $11,580,000. Eva’s estate at her death was worth $3,000,000. That left $8,580,000 unused. As Eva’s estate did not meet the threshold, the estate’s personal representative—who was Fred—did not file an estate tax return. But Fred can still elect portability for this DSUE. Under the latest IRS ruling, he has until the anniversary of Eva’s death in 2025 to file Form 706 and complete the election.

Planning Your Estate

Although choosing portability has few downsides, it may interfere with certain kinds of advanced tax planning, possibly causing family conflicts. Since tax law is a moving target and frequently changes, it is crucial to discuss your finances not only with your accountant but with an estate planning attorney. An experienced estate planner can help you and your spouse structure your assets in ways that will protect both of you, reducing the difficulty and expense that your loved ones will face after your death.

If you would like to discuss your estate in Indiana, contact us today. We can assist you with creating wills and trusts that provide asset protection for your estate and your family. Call us at (765) 234-8024 to schedule an appointment in our Anderson or Indianapolis offices.