Mind that DSUE (Deceased Spouse Unused Exclusion)

The estate tax exclusion for this year is $13.99 million and will rise to $15 million next year. If an individual's estate is worth less than that amount, his estate tax is zero; if more, then the tax is 40% on the amount over the exclusion.

Married couples can bequeath estates worth double the exclusion on a tax-free basis, but they must be careful to file an estate-tax return for the first spouse that dies. [bold added]

The U.S. tax code is generous when it comes to passing down money to heirs tax-free, and it has only become more so under the new tax law. But for married couples to obtain the full benefit, there is a strict set of rules. Messing up can be disastrous.

In the case of Billy Rowland, it cost his heirs $1.5 million in extra estate taxes.

Rowland expanded his many small businesses in Lorain, Ohio, over decades, with his hand in trucking, used cars, commercial real estate and banking. He served on local charity boards and wore a “World’s Greatest Grandpa” cap.

After he died, his executor filed an estate-tax return, and the Internal Revenue Service came calling in 2021, asking about the estate return of his late wife, Fay, filed years earlier. The tax agency said it believed her return was incomplete, and that disqualified his estate from getting a share of her exclusion.

The Rowland case has lawyers and accountants who prepare estate-tax returns on edge. The Tax Court sided with the IRS last month, disallowing the estate from using the common planning technique known as portability.

That lets a surviving spouse use any leftover exclusion amount from the first spouse to die—as long as the estate filed a return and filled it out properly. The trouble is, often no one checks the work until the second spouse dies. At that point, it can be too late to fix any mistakes.

The Tax Court said Rowland’s estate couldn’t take Fay’s unused exclusion amount of $3.7 million because of the error. Hence the extra taxes. The message to wealthy families is that obtaining the doubled estate tax shelter for married couples isn’t automatic...

For most surviving spouses, a $15 million exclusion is enough to shelter their estates from taxes. They don’t need the combined $30 million available to a married couple. Yet nearly 500,000 Americans have a net worth of $15 million or more, according to the global wealth tracker Altrata.

For those with estates worth $15 million to $30 million, it generally makes sense to file an estate-tax return when the first spouse dies to elect portability. “It would be a disaster if they fouled up,” said Ed Zollars, a Phoenix-based CPA.

Even those with less than $15 million today might need the first spouse’s extra exclusion amount later on. Their investments could grow, or they could get an unexpected inheritance or win the lottery...

IRS rules allow nontaxable estates to leave off specific values on the estate-tax return if the assets are left to a spouse or charity. Fay named children, grandchildren and friends among her heirs, so her estate wasn’t allowed to use those rules, the Tax Court said.

The rules may seem convoluted to people who are not tax accountants or lawyers, but the solution is relatively straightforward after 2025:

If there's a chance the combined estate will be worth more than $15 million after the death of the surviving spouse, file an estate-tax return upon the death of the first spouse--though there may be no tax due at the time. Be sure that the return assigns values to specific assets--I personally would use $10,000 as a threshold--and that the "DSUE amount portable to surviving spouse" (Form 706, Section 6, Part C, Line 10) is filled out.